We study the volatility of growth rates and find that it differs systematically across countries. Our empirical investigation reveals that there is a high correlation between disparity in political regimes across countries and differences in volatility. This is not the case for some of the commonly cited reasons like initial income, inequality or instability of regimes. We find that less democratic countries are more volatile. To explain this observation we use a dynamic model in which democracy is parameterized by the fraction of people who benefit from being in power. The government in this model maximizes the utility of the group in power using a redistributive tax scheme - setting uniform income taxes but transferring lump sum amounts and providing goods and services to the favored group only. When there is a bad shock in this economy, the marginal utility of consumption of agents in power is high. When the transfer is divided among a few, gains from increased transfer outweigh distortionary costs of higher tax. Thus, the optimal tax policy in non-democratic countries, in contrast to that in democratic countries, is such that tax rates are high when there is a bad shock and low when there is a good shock (we refer to this as procyclical tax policy). Further, we show that procyclical tax rates will lead to higher volatility of growth rates than under alternative tax policies. Thus, our model is successful in explaining why tax policies are pro-cyclical in some countries, a commonly observed phenomenon, in addition to providing reasons for differences in volatility of growth rates across countries. The model’s predictions are borne out by data in a number of other dimensions also
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Publisher Info
Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
515.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:515
Contact details of provider: Postal: Society for Economic Dynamics Anne Stubing CV Starr Center for Applied Economics 269 Mercer Street, Room 303 New York University New York, NY 10003 Fax: 1-860-486-4463 Email: Web page: http://www.EconomicDynamics.org/society.htm More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Christian Zimmermann).
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H2 - Public Economics - - Taxation, Subsidies, and Revenue O1 - Economic Development, Technological Change, and Growth - - Economic Development P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism