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Macroeconomic Consequences of Taxation in the 80s

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  • A Newell
  • James Symons

Abstract

During the 1980s the OECD countries experienced divergent trends in taxation. In some countries governments took to cutting tax rates, especially income tax rates, influenced perhaps by the supply-side economists. In other countries, tax rates continued to rise as had generally been the case through the 1970s. In this paper we investigate the effects of this divergence on macroeconomic performance, measured various ways, across countries. From a conventional, neo-classical, open economy setting, we generate a number of predictions for the consequences of tax rate changes, which we subsequently investigate empirically. We find robust and important effects suggesting that a large proportion of the divergence of economic performance through the 1980s can be explained by the supply side effects of tax policy. We subsequently investigate why tax policy diverged, and find that the state of public finances at the beginning of the decade, as well as changes in the political persuasion of government were both important influences on the direction of taxation policy.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0121.

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Date of creation: Feb 1993
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Handle: RePEc:cep:cepdps:dp0121

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Cited by:
  1. Giorgio Brunello & Maria Laura Parisi & Daniela Sonedda, 2002. "Labor Taxes and Wages: Evidence from Italy," CESifo Working Paper Series 715, CESifo Group Munich.
  2. Stephen Nickell, 1999. "Finnish unemployment : a view from outside," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 12(2), pages 62-81, Autumn.

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