Taxation and Economic Growth

56 Pages Posted: 30 Jun 2000 Last revised: 4 Dec 2022

See all articles by Eric M. Engen

Eric M. Engen

Board of Governors of the Federal Reserve System

Jonathan S. Skinner

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1996

Abstract

Tax reforms are sometimes touted to have strong macroeconomic growth effects. We consider the impact of a major tax reform on the long-term growth rates of the U.S. economy using three approaches. The first approach is to examine the historical record of the U.S. economy to evaluate whether tax cuts have been associated with economic growth. The second is to consider the evidence on taxation and growth for a large sample of countries. And finally, we use evidence from micro-level studies of labor supply, investment demand, and productivity growth. Our results suggest modest effects, on the order of 0.2 to 0.3 percentage point differences in growth rates in response to a major tax reform that changes all marginal tax rates by 5 percentage points and average tax rates by 2.5 percentage points. Nevertheless, even such small effects can have a large cumulative impact on living standards.

Suggested Citation

Engen, Eric M. and Skinner, Jonathan S., Taxation and Economic Growth (November 1996). NBER Working Paper No. w5826, Available at SSRN: https://ssrn.com/abstract=225613

Eric M. Engen (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Jonathan S. Skinner

Dartmouth College - Department of Economics ( email )

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United States
603-646-2535 (Phone)

National Bureau of Economic Research (NBER) ( email )

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