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Marginal income tax rates and economic growth in developing countries

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  • Easterly, William
  • Rebelo, Sergio

Abstract

One of the central predictions of growth theory, old and new, is that income taxes have a negative effect on the pace of economic expansion. Little empirical work has been done on the topic because of the difficulty of measuring the relevant marginal tax rates. Easterly and Rebelo experiment with a method for computing average marginal income tax rates that combines information on statutory rates with the amount of tax revenue collected and with data on income distribution. Their method relies heavily on the assumption that the marginal tax schedule has a logistic form. Their method stands a better chance of measuring the relevant average marginal tax rate than the widely used alternative of assuming (implicitly or explicitly) that the income tax is proportional. The possibility of estimating marginal income tax rates suggests two lines of research: a study of the properties of models with nonlinear income taxes and a search for adequate empirical strategies for testing those models with cross-country data.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1050.

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Date of creation: 30 Nov 1992
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Handle: RePEc:wbk:wbrwps:1050

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Inequality; Public Sector Economics&Finance; Governance Indicators;

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  1. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  2. McDonald, James B & Ransom, Michael R, 1979. "Functional Forms, Estimation Techniques and the Distribution of Income," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1513-25, November.
  3. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  4. Luis A. Rivera-Batiz & Paul M. Romer, 1991. "International Trade with Endogenous Technological Change," NBER Working Papers 3594, National Bureau of Economic Research, Inc.
  5. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  6. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  7. McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 647-63, May.
  8. Barro, Robert J. & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," Scholarly Articles 3451293, Harvard University Department of Economics.
  9. Sicat, Gerardo P & Virmani, Arvind, 1988. "Personal Income Taxes in Developing Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 2(1), pages 123-38, January.
  10. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(4), pages 555-66, October.
  11. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
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