Working Paper: NBER ID: w11000
Authors: N. Gregory Mankiw; Matthew Weinzierl
Abstract: This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.
Keywords: No keywords provided
JEL Codes: E1; H3; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax cuts (H29) | Higher national income (H59) |
| Capital income tax cut (H24) | Feedback effect (50% self-financing) (H23) |
| Labor income tax cut (H31) | Feedback effect (increase from 0% to 17%) (F62) |
| Finite horizons for consumers (D15) | Reduction in feedback effect (from 50% to 45%) (H23) |
| Market power (L11) | Enhanced self-financing ability of tax cuts (H29) |
| Positive externalities from capital accumulation (E22) | Amplified feedback effects of tax changes (H31) |