Growth Effects of Progressive Taxes

31 Pages Posted: 30 Jan 2002

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: November 2001

Abstract

Criticisms of endogenous growth models with flat rate taxes have highlighted two features that are not substantiated by the data. These models generally imply: (1) that economic growth must fall with the share of government expenditures in output across countries, and (2) that one-time shifts in marginal tax rates should instantaneously lead to similar shifts in output growth. In contrast, we show that allowing for heterogenous households and progressive taxes into otherwise conventional linear growth models radically changes these predictions. In particular, economic growth does not have to fall, and may even increase, with the share of government expenditures in output across countries. Moreover, discrete permanent shifts in tax policy now lead to protracted transitions between balanced growth paths. Both of these findings hold whether or not government expenditures are thought to be productive, and better conform to available empirical evidence.

Keywords: Economic growth, progressive taxation, heterogenous households

JEL Classification: E13, O23

Suggested Citation

Li, Wenli and Sarte, Pierre-Daniel, Growth Effects of Progressive Taxes (November 2001). FEDS Working Paper No. 2002-03. Available at SSRN: https://ssrn.com/abstract=298364 or http://dx.doi.org/10.2139/ssrn.298364

Wenli Li (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
172
Abstract Views
1,716
rank
149,747
PlumX Metrics