No. of Recommendations: 3
I posted this once before elsewhere, but I think it is interesting.


The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks [2007]
by Christina D. Romer and David H. Romer
University of California, Berkeley

The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.
The response to a long-run tax increase is negative, large, and highly statistically significant. In contrast, the response to a deficit-driven tax increase is positive, though not significant.
In terms of consequences, there are six main findings. First, tax changes have very large effects 41 on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent. Second, these estimated effects are substantially larger than those obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes. This suggests that failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not large effects of tax changes on the flexible-price level of output.

Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries [2008]
By Jens Arnold
Organisation for Economic Co-operation and Development

This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are accounted for. The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth. All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators.

Tax and Economic Growth [2008]

By Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia
Organisation for Economic Co-operation and Development

This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how redesigning taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising.

Economic growth and the role of taxation - Disaggregate data [2009]
By Gareth D. Myles
University of Exeter and Institute for Fiscal Studies
Organisation for Economic Co-operation and Development

207. There is evidence that growth is higher when the corporate income tax is lower. When the aggregate level of taxation is separated into components for the different taxes the level of corporate income tax becomes significant. The policy implications of this observation have to be carefully considered within an international setting. The corporate income tax affects investment at home, and foreign direct investment. If the increase in growth is driven by foreign direct investment (through the process of internationally-mobile capital seeking the maximum post-tax return) a multilateral reduction in corporate income taxes will not be beneficial.

208. Increases in the personal income tax reduce growth only by affecting the decision to choose entrepreneurship. The personal income tax might affect growth through it effect on labour supply, human capital accumulation, and saving behaviour. Labour supply is connected with a level effect, not a growth effect so even if labour supply is sensitive to taxation this is not important for growth. The effect of the income tax on human capital and saving are theoretically ambiguous. These are discussed further below. There is clear evidence that the personal income tax does affect the choice to enter entrepreneurship and the decisions of entrepreneurs. An increase in personal income tax reduces growth by discouraging entrepreneurship.

209. A change in the tax mix that increases the importance of consumption taxes relative to income taxes will raise growth. The theoretical mechanism through which this argument works is very clear. Income taxes distort the choice between consumption and saving by reducing the return on saving. This raises the effective price of consumption tomorrow relative to consumption today. An increase in saving raises the rate of increase of the capital stock. The effect is apparent in the aggregate tax regressions and is implicit in the disaggregated empirical results.

How do Taxes affect Investment and Productivity? - An Industry-Level Analysis of OECD Countries [2008]
By Laura Vartia
Organisation for Economic Co-operation and Development

This paper analyses how different tax policies can affect investment and productivity. To address this question the paper uses industry-level data from a set of OECD countries and examines whether different industries are affected differently by taxation. Investment is shown to respond negatively to an increase in the corporate tax rate and a decrease in capital depreciation allowances through changes in the user cost of capital. The analysis of potential links between taxes and productivity tests the hypothesis that taxes affect productivity through different channels and that due to some salient industry characteristics some industries are inherently more affected than others by certain taxes. The paper finds evidence that corporate and top personal income taxes have a negative effect on productivity. In contrast, tax incentives for research and development (R&D) are found to have a positive effect on productivity. These effects are stronger in those industries that are inherently more profitable, have more entrepreneurial activity and are more R&D intensive, respectively.

State Income Taxes and Economic Growth [2008]
by Barry W. Poulson and Jules Gordon Kaplan
Cato Institute

The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth.

The analysis underscores the negative impact of income taxes on economic growth in the states. Most states introduced an income tax and came to rely on the income tax as the primary source of revenue. Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue.
This article underscores the importance of controlling for convergence and regional influences on economic growth. After controlling for those factors, we find that tax policies were significant determinants of differential growth rates in the states.

Tax structure and economic growth [2004]
by Young Lee and Roger H. Gordon
Journal of Public Economics

This paper finds that the corporate tax rate is significantly negatively correlated with economic growth in a cross-section data set of 70 countries during 1970–1997, controlling for many other determinants/covariates of economic growth. We also find that other tax variables, including the average tax rate on labor income and Koester and Kormendi’s effective overall marginal tax rates, are not significantly associated with economic growth rates. The estimates suggest that cutting the corporate tax rate by 10 percentage points can increase the annual growth rate by around 1.1%. In fixed-effects estimates using a panel data set constructed for the same overall time period, estimated effects are larger, with the same tax change implying an increase in the annual growth rate of around 1.8%. An open question is the reason for this negative effect of the corporate tax rate on growth. We report evidence that lower corporate tax rates lead to lower personal tax revenue, a result consistent with a lower corporate tax rate encouraging more entrepreneurial activity. However, the aggregate information reported here is insufficient to draw a definitive conclusion about the precise source of the links between tax rates and growth.

Taxation and Economic Growth [1996]
by Eric Engen and Jonathan Skinner
National Tax Journal

First, we think that tax policy does affect economic growth. There is enough evidence linking taxation and output growth to make the reasonable inference that beneficial changes in tax policy can have modest effects on output growth. The implied effects from the “bottom-up” microlevel studies and the “top-down” cross-country regressions are quite close in magnitude: a major tax reform reducing all marginal rates by five percentage points and average tax rates by 2.5 percentage points is predicted to increase longterm growth rates by between 0.2 and 0.3 percentage points. Whether these effects on output growth are permanent (lasting forever) or transitory (lasting perhaps 10 to 15 years) is difficult to determine, both because our data sources do not extend for a lengthy period and because tax regimes themselves generally have such short half-lives.

Second, even these modest growth effects can have an important long-term impact on living standards. For example, suppose that an inefficient structure of taxation has, since 1960, retarded growth by 0.2 percent per annum. Accumulated over the past 36 years, the lower growth rate translates to a 7.5 percent lower level of GDP in 1996, or a net reduction in output of more than $500 billion annually. So the potential effects of tax policy, although difficult to detect in the time-series data, can be potentially very large in the long term.

Effects of Lower Capital Gains Taxes on Economic Growth [1990]
Congressional Budget Office

The eight analyses reviewed here reach a wide range of conclusions about the effects of cutting taxes on capital gains. Five of the studies-two by CBO and those by Auerbach, Gravelle, and Kotlikoff-find that a 30 percent capital gains exclusion would at best increase output by a very small amount. In these studies, increased GNP does not come close to offsetting the revenue losses that the Joint Committee on Taxation estimates would result from the exclusion. Two of the studies-by the CEA, and by Robbins and Robbins-find that a 30 percent exclusion would increase output by enough to offset the revenue losses estimated by the Joint Committee on Taxation. The final analysis consists of simulations presented by Sinai of two similar reductions
in the top capital gains rate to 15 percent. When only the top rate on capital gains is cut, and other tax and spending policies are unchanged, GNP increases by enough to pay for any revenue losses as estimated by the Joint Committee on Taxation. But when the rate reduction for individuals is included in a deficit reduction package, Sinai finds smaller, more short-term

Taken together, the studies raise doubt about whether cutting taxes on capital gains can be counted on to significantly increase GNP. Two of the studies reporting large positive effects on GNP have features that tend to overstate the stimulative effects of lower taxes on capital gains. The CEA study uses a cost-of-capital reduction that appears to be between two times and four times too large. The use of smaller cost-of-capital effects would reduce the CEA growth estimates proportionally. The Robbins and Robbins study appears to assume a much larger responsiveness of investment to the cost of capital than do other models, and, like the CEA model, assumes that the supply of savings is perfectly responsive. The conflict between the positive growth effects of the Sinai simulations reported by ACCF and the transitory effects mentioned in his testimony leaves the overall implications of his simulations uncertain.

The impact of taxes on economic behavior: High taxes decrease growth and investment [2008]
by Milagros Palacios and Kumi Harischandra
Fraser Institute

The evidence from economic research indicates that tax rates—and, in particular, marginal tax rates—do indeed inl uence individual behavior when it comes to working, investing, saving, and entrepreneurship. Perhaps most importantly, high and increasing marginal taxes contribute to lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, lower than expected aggregate labor supply, and reduced entrepreneurship. In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, investment, and entrepreneurship. [Link no longer available]

Does the Progressivity of Taxes Matter for Economic Growth? [2000]
Elizabeth M. Caucutt - University of Rochester
Selahattin Imrohoroglu - University of Southern California
Krishna B. Kumar - University of Southern California
Federal Reserve Bank of Minneapolis

The heterogeneous-agent, endogenous growth framework developed in this paper is a step toward analyzing the structural linkages between growth and inequality. We find it interesting that a less progressive tax system, which is rarely perceived as a egalitarian measure, gives rise to increased growth, decreased inequality, and greater mobility for the poor in the long run, especially in light of contradicting claims in the literature regarding the connection between growth and inequality.

The finding that the progressivity of taxes has a non-neutral (negative) effect on growth seems theoretically robust; experiments on a calibrated model indicate the quantitative effects are economically significant, ranging from 0.13 to 0.53 percentage points. Reform in the structure of taxes has more of an effect than reform in the level of taxes alone. We also find that the assumption made about the engine of growth matters, both qualitatively and quantitatively.

When progressivity decreases, welfare unequivocally increases across balanced growth paths; however, once transition is taken into account, only the currently rich slightly prefer the flat-rate system. While the long-run welfare gains of moving to a flat rate system is high, so are the costs of transition, resulting in little change in aggregate welfare; the effect, if anything, is slightly negative. The exploration of debt-based schemes and gradual phase out of progressivity to soften the blow for the initially poor and make them "buy into" the flat rate system semm useful avenues for future research.

Growth, Taxes, and Government Expenditures: Growth Hills for U.S. States [2007]
Neil Bania - University of Oregon
Jo Anna Gray - University of Oregon
Joe A. Stone - University of Oregon
National Tax Journal

In this study, we explore nonlinearities in state fiscal policies, in particular both linear and quadratic effects for taxes spent on productive government activities. Results for U.S. states provide support for the “growth hill” predicted by the Barro-style models: the incremental effect of tax financed expenditures on productive government activities is non-monotonic – initially positive (a positive linear effect), but eventually negative (a sufficiently negative quadratic effect). The decline arises primarily from the crowding out of private capital as the rising (distortionary) tax share reduces the net return to private capital.

Tax changes and economic growth: Empirical evidence for a panel of OECD countries
Davide Furceri - OECD and University of Palermo
Georgios Karras - University of Illinois at Chicago

This paper estimated the effects of tax changes on real GDP growth per capita using annual data from the 1965 to 2003 period for a panel of 26 OECD economies. The empirical findings show that an increase in taxes has a negative and persistent effect on real GDP per capita. The size of the effect depends on how the “tax shock” is measured, but our estimates suggest that an increase in the total tax rate by 1% of GDP will have a long-run effect on real GDP per capita of –0.5% to –1%. This is smaller than Romer and Romer’s (2007) rather large estimated effect (approximately –3%), but their identification of a “tax shock” is very different from ours, and their measure of GDP is aggregate (not per capita). In addition, our estimates are much closer to those of Karras (1999) for a smaller OECD sample, and Blanchard and Perotti (2002) for the U.S. We also look at the effects of what are usually the four largest types of taxes: taxes on income, profits, and capital gains; taxes on property; social security contributions; and taxes on goods and services. Our findings imply that all four have negative effects on real GDP per capita, though those of property taxes are not statistically significant. Of the other three, our estimates suggest that an increase in social security taxes or taxes on goods and services has a larger effect on output than an increase in the income tax.
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.