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Growth, Death, and Taxes

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  • Hendricks, Lutz A.

Abstract

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.

Suggested Citation

  • Hendricks, Lutz A., 2001. "Growth, Death, and Taxes," Staff General Research Papers Archive 11930, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:11930
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    Cited by:

    1. Hendricks, Lutz, "undated". "Taxation and Long-Run Growth," Working Papers 96/2, Arizona State University, Department of Economics.
    2. Shu‐Hua Chen & Jang‐Ting Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(3), pages 865-880, August.
    3. Hendricks, Lutz, 2003. "Taxation and the intergenerational transmission of human capital," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1639-1662, July.

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    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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