Growth effects of progressive taxes

Wenli Li and Pierre Daniel Sarte

No 03-15, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors study the effects of progressive taxes in conventional endogenous growth models augmented to include heterogeneous households. In contrast to representative agent models with flat-rate taxes, this framework allows us to distinguish between marginal tax rates and the empirical proxies that are typically used for these rates such as the share of tax revenue, or government expenditures, in GDP. The analysis then illustrates how the endogenous nature of these proxy variables causes them to be weakly correlated, or even increase, with economic growth. This study, therefore, helps explain why cross-country regressions have mostly failed to uncover the distortional growth effects of taxes. In fact, while past U.S. tax reforms appear to have contributed only small increases in per capita GDP growth, the authors' analysis nevertheless suggests that differences in tax codes across countries explain a two and a half percent variation in cross-sectional growth rates. Finally, the authors show that progressivity also introduces significant lags in the effects of tax changes on output growth.

Keywords: Taxation (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-acc, nep-dge and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2003/wp03-15.pdf (application/pdf)

Related works:
Working Paper: Growth effects of progressive taxes (2002)
Working Paper: Growth effects of progressive taxes (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:03-15

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().