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Non-Linear Effects of Taxation on Growth

40 Pages Posted: 20 Oct 2012  

Nir Jaimovich

Duke University

Sergio T. Rebelo

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

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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 Rebelo, Sergio T., 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)

Duke University ( email )

100 Fuqua Drive
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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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Evanston, IL 60208
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847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

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University of Rochester - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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