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Taxes And Growth: Testing The Neoclassical And Endogenous Growth Models

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  • GEORGIOS KARRAS

Abstract

"Changes in the tax rate alter real growth permanently in an endogenous growth model, but only temporarily in a neoclassical model, where the only permanent effect is a decrease in the steady-state level of output per capita. Using data from the 1960'1992 period for a panel of 11 Organization of Economic Cooperation and Development economies, this paper's empirical results support the following conclusions. First, consistent with the tax smoothing hypothesis, tax rates have exhibited significant persistent changes while output growth rates have not. Second, a higher tax rate permanently reduces the level of output but has no permanent effects on the output growth rate. These findings are inconsistent with endogenous growth mechanisms and suggest that the relationship between output and the tax rate is best described by the neoclassical growth model. (JEL" E62, 041) Copyright 1999 Western Economic Association International.

Suggested Citation

  • Georgios Karras, 1999. "Taxes And Growth: Testing The Neoclassical And Endogenous Growth Models," Contemporary Economic Policy, Western Economic Association International, vol. 17(2), pages 177-188, April.
  • Handle: RePEc:bla:coecpo:v:17:y:1999:i:2:p:177-188
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    Cited by:

    1. repec:bla:coecpo:v:35:y:2017:i:1:p:165-192 is not listed on IDEAS
    2. Gemmell Norman & Au Joey, 2013. "Do Smaller Governments Raise the Level or Growth of Output? A Review of Recent Evidence," Review of Economics, De Gruyter, vol. 64(2), pages 85-116, August.
    3. Nazila Alinaghi & W. Robert Reed, 2016. "Taxes and Economic Growth in OECD Countries: A Meta-Analysis," Working Papers in Economics 16/37, University of Canterbury, Department of Economics and Finance.
    4. Marc Tomljanovich, 2004. "The Role of State Fiscal Policy in State Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 318-330, July.
    5. Daniel G. Swaine, 1999. "Is the U.S. economy characterized by endogenous growth?: a time-series test of two stochastic growth models," Working Papers 99-9, Federal Reserve Bank of Boston.
    6. Romero-Ávila, Diego & Strauch, Rolf, 2008. "Public finances and long-term growth in Europe: Evidence from a panel data analysis," European Journal of Political Economy, Elsevier, vol. 24(1), pages 172-191, March.
    7. W. Robert Reed & Cynthia L. Rogers, 2006. "Tax Burden and the Mismeasurement of State Tax Policy," Public Finance Review, , vol. 34(4), pages 404-426, July.
    8. Norman Gemmell & Richard Kneller & Ismael Sanz, 2011. "The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries," Economic Journal, Royal Economic Society, vol. 121(550), pages 33-58, February.
    9. Margit Schratzenstaller, 2007. "WIFO White Paper: Public Sector Contribution to Growth," WIFO Monatsberichte (monthly reports), WIFO, vol. 80(6), pages 509-526, June.
    10. Gemmell, Norman & Au, Joey, 2012. "Government Size, Fiscal Policy and the Level and Growth of Output: A Review of Recent Evidence," Working Paper Series 2603, Victoria University of Wellington, Chair in Public Finance.
    11. Moore, Winston, 2008. "The Responsiveness of Taxable Income to Changes in Marginal Tax Rates in Barbados," MPRA Paper 21583, University Library of Munich, Germany.
    12. Chokri Terzi & Anis El Ammari & Ali Bouchrika & Khalil Mhadhbi, 2017. "Optimal Taxation and Economic Growth in Tunisia: Short and Long Run Cointegration Analysis," Working Papers hal-01541131, HAL.
    13. Luoto, Jani, 2011. "Aggregate infrastructure capital stock and long-run growth: Evidence from Finnish data," Journal of Development Economics, Elsevier, vol. 94(2), pages 181-191, March.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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