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Taxation and Economic Growth

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  • Eric M. Engen
  • Jonathan Skinner

Abstract

Tax reforms are sometimes touted to have strong macroeconomic growth effects. We consider the impact of a major tax reform on the long-term growth rates of the U.S. economy using three approaches. The first approach is to examine the historical record of the U.S. economy to evaluate whether tax cuts have been associated with economic growth. The second is to consider the evidence on taxation and growth for a large sample of countries. And finally, we use evidence from micro-level studies of labor supply, investment demand, and productivity growth. Our results suggest modest effects, on the order of 0.2 to 0.3 percentage point differences in growth rates in response to a major tax reform that changes all marginal tax rates by 5 percentage points and average tax rates by 2.5 percentage points. Nevertheless, even such small effects can have a large cumulative impact on living standards.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5826.

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Date of creation: Nov 1996
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Handle: RePEc:nbr:nberwo:5826

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  1. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1992. "Reassessing the social returns to equipment investment," Working Paper Series / Economic Activity Section 129, Board of Governors of the Federal Reserve System (U.S.).
  2. William Easterly & Sergio Rebelo, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  3. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Income Taxes and Entrepreneurs' Use of Labor," NBER Working Papers 6578, National Bureau of Economic Research, Inc.
  4. Atkinson, Anthony B., 1995. "The Welfare State and Economic Performance," National Tax Journal, National Tax Association, vol. 48(2), pages 171-98, June Cita.
  5. Magnus Blomstrom & Robert E. Lipsey & Mario Zejan, 1996. "Is Fixed Investment the Key to Economic Growth?," NBER Working Papers 4436, National Bureau of Economic Research, Inc.
  6. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  8. Boskin, Michael J, 1988. "Tax Policy and Economic Growth: Lessons from the 1980s," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 71-97, Fall.
  9. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  10. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey Rosen, 1996. "Income Taxes and Entrepreneur' Use of Labor," Working Papers 752, Princeton University, Department of Economics, Industrial Relations Section..
  11. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
  12. Martin Feldstein, 1997. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  13. Alm, James, 1996. "What Is an "Optimal'"Tax System?," National Tax Journal, National Tax Association, vol. 49(1), pages 117-33, March Cit.
  14. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
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