Growth, Death, and Taxes

Arizona State University Working Paper 97/7

28 Pages Posted: 15 Mar 1998

See all articles by Lutz Hendricks

Lutz Hendricks

UNC Chapel Hill; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: August 1997

Abstract

A number of recent studies suggest that flat rate taxes may have important effects on long-run growth in the neoclassical growth model with human capital. In contrast to the traditional human capital literature, these studies assume that agents are infinitely lived and face constant returns in training. This paper shows that abstracting from life-cycle features and diminishing returns distorts growth effects in important ways. Analytical solutions for the growth effects of wage taxes are compared for finite and infinite horizon versions of the neoclassical growth model. The notion that growth effects with long but finite horizons are well approximated by infinite horizons is shown to be invalid, except in special cases. Generically, the assumptions made in the literature lead to a systematic overstatement of growth effects. Illustrative numerical results suggest that the discrepancies may be large.

JEL Classification: J24, O41

Suggested Citation

Hendricks, Lutz, Growth, Death, and Taxes (August 1997). Arizona State University Working Paper 97/7, Available at SSRN: https://ssrn.com/abstract=56182 or http://dx.doi.org/10.2139/ssrn.56182

Lutz Hendricks (Contact Author)

UNC Chapel Hill ( email )

Chapel Hill, NC 27599
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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