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Growth effects of progressive taxes

Author

Listed:
  • Wenli Li
  • Pierre-Daniel G. Sarte
Abstract
The authors study the effects of progressive taxes in conventional endogenous growth models augmented to include heterogeneous households. In contrast to representative agent models with flat-rate taxes, this framework allows us to distinguish between marginal tax rates and the empirical proxies that are typically used for these rates such as the share of tax revenue, or government expenditures, in GDP. The analysis then illustrates how the endogenous nature of these proxy variables causes them to be weakly correlated, or even increase, with economic growth. This study, therefore, helps explain why cross-country regressions have mostly failed to uncover the distortional growth effects of taxes. In fact, while past U.S. tax reforms appear to have contributed only small increases in per capita GDP growth, the authors' analysis nevertheless suggests that differences in tax codes across countries explain a two and a half percent variation in cross-sectional growth rates. Finally, the authors show that progressivity also introduces significant lags in the effects of tax changes on output growth.

Suggested Citation

  • Wenli Li & Pierre-Daniel G. Sarte, 2003. "Growth effects of progressive taxes," Working Papers 03-15, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:03-15
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    References listed on IDEAS

    as
    1. Charles T. Carlstrom & David Altig, 1999. "Marginal Tax Rates and Income Inequality in a Life-Cycle Model," American Economic Review, American Economic Association, vol. 89(5), pages 1197-1215, December.
    2. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    3. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 645-661.
    4. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    5. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    6. Robert A. Becker, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 375-382.
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    Cited by:

    1. Elizabeth M. Caucutt & Selahattin İmrohoroğlu & Krishna B. Kumar, 2006. "Does the Progressivity of Income Taxes Matter for Human Capital and Growth?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 95-118, January.
    2. Michele Fabrizi & Elisabetta Ipino & Michel Magnan & Antonio Parbonetti, 2016. "Real Regulatory Capital Management and Dividend Payout: Evidence from Available-for-Sale Securities," CIRANO Working Papers 2016s-57, CIRANO.
    3. repec:fst:rfsisf:v:7:y:2022:i:13:p:132-145 is not listed on IDEAS
    4. Sorana Vatavu & Oana-Ramona Lobont & Petru Stefea & Daniel Brindescu-Olariu, 2019. "How Taxes Relate to Potential Welfare Gain and Appreciable Economic Growth," Sustainability, MDPI, vol. 11(15), pages 1-16, July.

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