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Abstract

This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply, departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2057.

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Date of creation: 2005
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Handle: RePEc:fth:harver:2057

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Find related papers by JEL classification:

• E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
• H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
• H6 - Public Economics - - National Budget, Deficit, and Debt

References

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21. repec:fth:harver:1435 is not listed on IDEAS
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