Growth effects of progressive taxes
AbstractThe authors study the effects of progressive taxes in conventional endogenous growth models augmented to include heterogeneous households. In contrast to representative agent models with flat-rate taxes, this framework allows us to distinguish between marginal tax rates and the empirical proxies that are typically used for these rates such as the share of tax revenue, or government expenditures, in GDP. The analysis then illustrates how the endogenous nature of these proxy variables causes them to be weakly correlated, or even increase, with economic growth. This study, therefore, helps explain why cross-country regressions have mostly failed to uncover the distortional growth effects of taxes. In fact, while past U.S. tax reforms appear to have contributed only small increases in per capita GDP growth, the authors' analysis nevertheless suggests that differences in tax codes across countries explain a two and a half percent variation in cross-sectional growth rates. Finally, the authors show that progressivity also introduces significant lags in the effects of tax changes on output growth.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-15.
Date of creation: 2003
Date of revision:
Other versions of this item:
- Wenli Li & Pierre-Daniel G. Sarte, 2001. "Growth effects of progressive taxes," Working Paper 01-09, Federal Reserve Bank of Richmond.
- Wenli Li & Pierre-Daniel Sarte, 2002. "Growth effects of progressive taxes," Finance and Economics Discussion Series 2002-3, Board of Governors of the Federal Reserve System (U.S.).
- NEP-ACC-2004-08-09 (Accounting & Auditing)
- NEP-ALL-2004-08-09 (All new papers)
- NEP-DGE-2004-08-09 (Dynamic General Equilibrium)
- NEP-PUB-2004-08-09 (Public Finance)
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