Dynamic Scoring in a Romer-Style Economy

This article analyzes how changes in tax rates affect government revenue in a Romer-style endogenous growth model. Lower tax rates on financial income (returns to physical capital and intellectual property) are partially self-financing primarily because lower financial income taxes stimulate innovation and enhance labor productivity in the long run. In the baseline calibration, about half of a tax cut is self-financing in the long run, substantially more than in the Ramsey model. The dynamics of the economy's response to a tax cut are very sluggish and, for some variables, nonmonotonic.