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Growth, Death, and Taxes

The literature on the growth effects of flat rate taxes focuses entirely on models with infinite horizons and constant returns to private inputs in human capital accumulation. In contrast, the traditional human capital literature assumes finite lifetimes and, based on microeconomic evidence, diminishing returns. Since human capital is not heritable, the infinite horizon framework cannot, in general, be justified as a reduced form of an overlapping generations model; it represents an approximation of unknown accuracy. This paper shows that abstracting from finite lives and diminishing returns makes an important difference for the growth effect of taxation, even if there is an operative bequest motive. Except in a knife-edge case, the growth effects of taxation become small (and may go to zero) as lifetimes get long, suggesting that infinite horizons may be a terrible approximation for long, finite horizons.

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Paper provided by Arizona State University, Department of Economics in its series Working Papers with number 97/7.

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Handle: RePEc:wop:astewp:9707
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  1. Eric M. Engen & Jonathan Skinner, 1996. "Taxation and Economic Growth," NBER Working Papers 5826, National Bureau of Economic Research, Inc.
  2. Hendricks, Lutz, . "Taxation and Long-Run Growth," Working Papers 96/2, Arizona State University, Department of Economics.
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  11. Rangazas, Peter C, 1996. "Fiscal Policy and Endogenous Growth in a Bequest-Constrained Economy," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 52-74, January.
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  15. Perroni, Carlo, 1995. "Assessing the Dynamic Efficiency Gains of Tax Reform When Human Capital Is Endogenous," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 907-25, November.
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  18. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
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