Recent theories of endogenous growth suggest that changes in tax rates may permanently affect growth. However, attempts to quantify these growth effects have reached very different conclusions in spite of a common theoretical framework: the neoclassical growth model with human capital accumulation by infinitely lived households. This paper shows that a model that explicitly specifies human capital accumulation over the life-cycle provides sharper answers. In such a model, a plausible range for the growth effects of eliminating taxes in the United States is between 0.5 and 1.3 percentage points compared with 0 to 4 percentage points in the infinite horizon model. The much wider range found in the literature is due to two assumptions which are commonly viewed as innocuous simplifications but contrast sharply with traditional human capital theory: that households are infinitely lived and face constant point-in-time returns in human capital accumulation. The widely held view that long, finite horizons are closely approximated by infinite horizons is generally invalid. Abstracting from finite horizons leads to a systematic overstatement of the growth effects of taxes.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
11930.
Length: Date of creation: 05 May 2004 Date of revision: Publication status: Published in Review of Economic Dynamics, 2001, Vol. 4, No. 1, pp. 26-57. Handle: RePEc:isu:genres:11930
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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[Downloadable!]
Roland Bénabou, 1996.
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in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92
National Bureau of Economic Research, Inc.
[Downloadable!]
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