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Taxation and Economic Growth

  • Eric M. Engen
  • Jonathan Skinner

Tax reforms are sometimes touted to have strong macroeconomic growth effects. We consider the impact of a major tax reform on the long-term growth rates of the U.S. economy using three approaches. The first approach is to examine the historical record of the U.S. economy to evaluate whether tax cuts have been associated with economic growth. The second is to consider the evidence on taxation and growth for a large sample of countries. And finally, we use evidence from micro-level studies of labor supply, investment demand, and productivity growth. Our results suggest modest effects, on the order of 0.2 to 0.3 percentage point differences in growth rates in response to a major tax reform that changes all marginal tax rates by 5 percentage points and average tax rates by 2.5 percentage points. Nevertheless, even such small effects can have a large cumulative impact on living standards.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5826.

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Date of creation: Nov 1996
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Publication status: published as National Tax Journal (december 1996)
Handle: RePEc:nbr:nberwo:5826
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