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Marginal income tax rates and economic growth in developing countries

  • Easterly, William
  • Rebelo, Sergio

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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  1. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  2. McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, vol. 52(3), pages 647-63, May.
  3. 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.
  4. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-66, October.
  5. 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.
  6. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  7. Sicat, Gerardo P & Virmani, Arvind, 1988. "Personal Income Taxes in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(1), pages 123-38, January.
  8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  9. Barro, Robert J. & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," Scholarly Articles 3451293, Harvard University Department of Economics.
  10. 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.
  11. 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.
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