Working Paper: CEPR ID: DP1378
Authors: Enrique G. Mendoza; Gian Maria Milesi-Ferretti; Patrick Asea
Abstract: Harberger?s superneutrality conjecture contends that, although in theory the mix of direct and indirect taxes affects investment and growth, in practice tax policy is ineffective as an instrument to promote growth. This paper provides evidence to support this view by examining the predictions of endogenous growth models driven by human capital accumulation. The empirical work is based on numerical simulations and cross-country regressions, using a new methodology for constructing aggregate effective tax rates. Results show significant investment effects from taxes that are consistent with negligible growth effects. The results are robust to the introduction of other growth determinants.
Keywords: endogenous growth; private investment; tax structure; tax rate estimates
JEL Codes: E6; E62; O4; O5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial income and secondary school enrollment (I21) | Growth determinants (O49) |
| Changes in the tax structure (H20) | Private investment levels (F21) |
| Higher capital and labor income taxes (H29) | Lower investment rates (G31) |
| Higher consumption taxes (H29) | Increased investment (E22) |
| Reduction in labor income taxes (H31) | Increase in investment rate (E22) |
| Reduction in capital income taxes (D33) | Increase in investment rate (E22) |
| Tax changes (H29) | Growth rates (O49) |
| Tax policy (H29) | Welfare (I38) |