Working Paper: NBER ID: w18473
Authors: Nir Jaimovich; Sergio Rebelo
Abstract: We propose a model consistent with two observations. First, the tax rates adopted by different countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest, severely hurt their growth performance. In our model, the effects of taxation on growth are highly non-linear. Low or moderate tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth difficult to measure empirically.
Keywords: Taxation; Economic Growth; Nonlinear Effects
JEL Codes: H20; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low or moderate tax rates (H29) | negligible effect on long-run growth rates (F62) |
| high tax rates (H29) | exit of high-ability entrepreneurs (L26) |
| exit of high-ability entrepreneurs (L26) | significant decline in overall economic growth (F69) |
| high tax rates (H29) | decline in growth (O49) |
| median voter choice (D79) | tax rates that do not severely compromise growth (H21) |
| high tax rates (H29) | more pronounced decline in growth (O49) |