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Dynamic Scoring in a Romer-style Economy

This paper explores the dynamic behavior of a Romer-style endogenous growth model, analyzing how changes in tax rates affect government revenue in the short run and the long run. I show that in this environment lowering taxes on financial income is unlikely to stimulate tax revenue in the long run and has modest effects on the tax base, contrary to some other studies of the dynamic response of revenue to tax rates. Calibrations of the model that suggest Laffer curve effects can be substantial require implausibly low values for the elasticity of substitution between varieties of intermediate goods. For more plausible parameter values, I find that around 20% of a tax cut would be self-financing due to an expansion in the tax base.

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File URL: http://commons.colgate.edu/cgi/viewcontent.cgi?article=1008&context=econ_facschol
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Paper provided by Department of Economics, Colgate University in its series Working Papers with number 2010-02.

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Date of creation: Feb 2010
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Handle: RePEc:cgt:wpaper:2010-02
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  1. Alfonso Novales & Jesús Ruiz, 2001. "Dynamic Laffer Curves," Documentos de Trabajo del ICAE 0106, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  2. Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
  3. Jonas Agell & Mats Persson, 2000. "On the Analytics of the Dynamic Laffer Curve," CESifo Working Paper Series 383, CESifo Group Munich.
  4. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  5. Hendricks, Lutz A., 1999. "Taxation and Long-Run Growth," Staff General Research Papers Archive 11933, Iowa State University, Department of Economics.
  6. N. Gregory Mankiw & Matthew Weinzierl, 2004. "Dynamic Scoring: A Back-of-the-Envelope Guide," NBER Working Papers 11000, National Bureau of Economic Research, Inc.
  7. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "Growth Effects of Income and Consumption Taxes," CEPR Discussion Papers 1979, C.E.P.R. Discussion Papers.
  8. Paul A. de Hek, 2003. "On Taxation in a Two-Sector Endogenous Growth Model with Endogenous Labor Supply," Tinbergen Institute Discussion Papers 03-029/2, Tinbergen Institute.
  9. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  10. Pecorino, Paul, 1995. "Tax rates and tax revenues in a model of growth through human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 527-539, December.
  11. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  12. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  14. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
  15. Malcomson, James M., 1986. "Some analytics of the laffer curve," Journal of Public Economics, Elsevier, vol. 29(3), pages 263-279, April.
  16. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
  17. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  18. Martin Mühleisen & Hamid Faruqee, 2001. "Population Aging in Japan; Demographic Shock and Fiscal Sustainability," IMF Working Papers 01/40, International Monetary Fund.
  19. Alan J. Auerbach, 1996. "Dynamic Revenue Estimation," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 141-157, Winter.
  20. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  21. Hendricks, Lutz, 1999. "Taxation and long-run growth1," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 411-434, April.
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