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Marginal income tax rates and economic growth in developing countries

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  • Easterly, William
  • Rebelo, Sergio

Abstract

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.

Suggested Citation

  • Easterly, William & Rebelo, Sergio, 1992. "Marginal income tax rates and economic growth in developing countries," Policy Research Working Paper Series 1050, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1050
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    References listed on IDEAS

    as
    1. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-550, June.
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    More about this item

    Keywords

    Environmental Economics&Policies; Economic Theory&Research; Inequality; Public Sector Economics&Finance; Governance Indicators;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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