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Marginal income tax rates and economic growth in developing countries

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Author Info
Easterly, William
Rebelo, Sergio

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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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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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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.:
  1. Robert J. Barro & Chaipat Sahasakul, 1983. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," NBER Working Papers 1214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May. [Downloadable!] (restricted)
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  3. McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, vol. 52(3), pages 647-63, May. [Downloadable!] (restricted)
  4. McDonald, James B & Ransom, Michael R, 1979. "Functional Forms, Estimation Techniques and the Distribution of Income," Econometrica, Econometric Society, vol. 47(6), pages 1513-25, November. [Downloadable!] (restricted)
  5. 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, vol. 98(5), pages 1008-38, October. [Downloadable!] (restricted)
  6. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  7. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June. [Downloadable!] (restricted)
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  8. Rivera-Batiz, Luis A. & Romer, Paul M., 1991. "International trade with endogenous technological change," European Economic Review, Elsevier, vol. 35(4), pages 971-1001, May. [Downloadable!] (restricted)
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  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Gradstein, Mark, 2005. "Democracy, Property Rights, Redistribution and Economic Growth," CEPR Discussion Papers 5130, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Bilin Neyapti & Nida Cakir, 2007. "Does Fiscal Decentralization Promote Fiscal Discipline?," Departmental Working Papers 0708, Bilkent University, Department of Economics. [Downloadable!]
  3. Enrique G. Mendoza & Gian Maria Milesi-Ferretti & Patrick Asea, 1995. "Do taxes matter for long-run growth?: Harberger's superneutrality conjecture," International Finance Discussion Papers 511, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. William Easterly & Sergio Rebelo, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Meenagh, David & Minford, Patrick & Wang, Jiang, 2007. "Growth and relative living standards - testing Barriers to Riches on post-war panel data," CEPR Discussion Papers 6288, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Sabirianova Peter, Klara & Buttrick, Steve & Duncan, Denvil, 2009. "Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries," IZA Discussion Papers 4228, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Bénabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Immervoll H, 2002. "The Distribution Of Average And Marginal Effective Tax Rates In European Union Member States," EUROMOD Working Papers EM2/02, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
  9. Geuna,Aldo, 1996. "European universities : an interpretative history," Research Memoranda 008, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  10. Debasis Bandyopadhyay & Xueli Tang, 2009. "Inequality may retard growth but sometimes progressive redistribution makes it worse," Economics Series 2009_15, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
  11. Herwig Immervoll, 2003. "The Distribution Of Average And Marginal Effective Tax Rates In European Union Member States," Public Economics 0302005, EconWPA. [Downloadable!]
  12. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1999. "Corruption, public finances, and the unofficial economy," Policy Research Working Paper Series 2169, The World Bank. [Downloadable!]
  13. José E. Boscá & José R. García & David Tagüas, 2005. "Effective Tax rates and Fiscal Convergence in the OECD: 1965-2001," Hacienda Pública Española, IEF, vol. 174(3), pages 119-141, September. [Downloadable!]
  14. Immervoll H, 2004. "Average And Marginal Effective Tax Rates Facing Workers In The EU. A Micro Level Analysis Of Levels, Distributions And Driving Factors (Revised Version Of EM2/02)," EUROMOD Working Papers EM6/04, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
  15. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1995. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Gian Maria Milesi-Ferrett & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," NBER Working Papers 5317, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Musisi, A.A., 2006. "Physical public infrastructure and private sector output/productivity in Uganda: a firm level analysis," Working Papers - General Series 424, Institute of Social Studies. [Downloadable!]
  18. Peter N. Ireland, 1994. "Two perspectives on growth and taxes," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-18. [Downloadable!]
  19. Assaf Razin & Chi-Wa Yuen, 1999. "Optimal International Taxation and Growth Rate Convergence: Tax Competition vs. Coordination," International Tax and Public Finance, Springer, vol. 6(1), pages 61-78, February. [Downloadable!] (restricted)
  20. Basil A. Dalamagas, 1998. "Testing the Validity of the Laffer-Curve Hypothesis," Annales d'Economie et de Statistique, ADRES, issue 52, pages 04, Octobre-D. [Downloadable!]
  21. Ziesemer ,Thomas, 1996. "Dissent on convergence : the role of public factors, international trade and path dependence," Research Memoranda 004, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  22. Patrick Minford & David Meenagh & Jiang Wang, 2006. " Testing a Simple Structural Model of Endogenous Growth," CDMA Conference Paper Series 0606, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  23. Eon-Seon Rym & Faik Koray, 2004. "Average marginal tax rates in the UK economy," Applied Economics, Taylor and Francis Journals, vol. 36(21), pages 2369-2372, December. [Downloadable!] (restricted)
  24. Jinli Zeng, 2002. "Reexamining the Interaction between Innovation and Capital Accumulation," Departmental Working Papers wp0203, National University of Singapore, Department of Economics. [Downloadable!]
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