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Growth, Taxes, and Government Expenditures: Growth Hills for U.S. States

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  • Bania, Neil
  • Gray, Jo Anna
  • Stone, Joe A.

Abstract

Barro–style models of endogenous growth imply that economic growth will initially rise with an increase in taxes directed toward economically "productive" expenditures (e.g., education, highways, public safety), but will subsequently decline—consistent with a "growth hill"—as the rising tax share depresses the net return to private capital. Previous tests focus on whether the linear incremental effect of taxes is positive, negative, or zero, with substantial evidence for all three conclusions. This study incorporates potentially non–monotonic effects for fiscal policy. Based on estimates for U.S. states, the incremental effect of taxes directed toward publicly provided productive inputs is initially positive, but eventually turns negative, consistent with a growth hill.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 60 (2007)
Issue (Month): 2 (June)
Pages: 193-204

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Handle: RePEc:ntj:journl:v:60:y:2007:i:2:p:193-204

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Cited by:
  1. Gray, Jo Anna & Stone, Joe A., 2012. "Debt and nonlinear fiscal policy: evidence from the states," MPRA Paper 39731, University Library of Munich, Germany.
  2. Theodore Palivos & Dimitrios Varvarigos, 2009. "Intergenerational Complementarities in Education and the Relationship between Growth and Volatility," Discussion Paper Series 2009_05, Department of Economics, University of Macedonia, revised Mar 2009.
  3. McPhail, Joseph E. & Orazem, Peter & Singh, Rajesh, 2010. "The Poverty of States: Do State Tax Policies Affect State Labor Productivity?," Staff General Research Papers 31552, Iowa State University, Department of Economics.
  4. Norman Gemmell & Joey Au, 2013. "Do Smaller Governments Raise the Level or Growth of Output? A Review of Recent Evidence," Review of Economics, Lucius & Lucius, vol. 64(2), pages 85-116.
  5. Norman Gemmell & Richard Kneller & Ismael Sanz, 2011. "The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries," Economic Journal, Royal Economic Society, vol. 121(550), pages F33-F58, February.
  6. Fritsch, Michael & Kritikos, Alexander S. & Pijnenburg, Katharina, 2013. "Business Cycles, Unemployment and Entrepreneurial Entry: Evidence from Germany," IZA Discussion Papers 7852, Institute for the Study of Labor (IZA).
  7. Arin, K. Peren & Berlemann, Michael & Koray, Faik & Kuhlenkasper, Torben, 2011. "The taxation-growth-nexus revisited," HWWI Research Papers 104, Hamburg Institute of International Economics (HWWI).
  8. W. Robert Reed, 2013. "A Note on the Practice of Lagging Variables to Avoid Simultaneity," Working Papers in Economics 13/32, University of Canterbury, Department of Economics and Finance.

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