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Dynamic Scoring in a Romer-style Economy

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Abstract

This paper explores the dynamic behavior of a Romer-style endogenous growth model, analyzing how changes in tax rates affect government revenue in the short run and the long run. I show that in this environment lowering taxes on financial income is unlikely to stimulate tax revenue in the long run and has modest effects on the tax base, contrary to some other studies of the dynamic response of revenue to tax rates. Calibrations of the model that suggest Laffer curve effects can be substantial require implausibly low values for the elasticity of substitution between varieties of intermediate goods. For more plausible parameter values, I find that around 20% of a tax cut would be self-financing due to an expansion in the tax base.

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Paper provided by Department of Economics, Colgate University in its series Working Papers with number 2010-02.

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Date of creation: Feb 2010
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Handle: RePEc:cgt:wpaper:2010-02

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  1. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
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Cited by:
  1. Oudheusden, P. van, 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.

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