Non-Linear Effects of Taxation on Growth

40 Pages Posted: 20 Oct 2012

See all articles by Nir Jaimovich

Nir Jaimovich

University of Zurich

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2012

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.

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio, Non-Linear Effects of Taxation on Growth (October 2012). NBER Working Paper No. w18473. Available at SSRN: https://ssrn.com/abstract=2164597

Nir Jaimovich (Contact Author)

University of Zurich ( email )

Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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