NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Non-linear Effects of Taxation on Growth

Nir Jaimovich, Sergio Rebelo

NBER Working Paper No. 18473
Issued in October 2012
NBER Program(s):   EFG

We propose a model consistent with two observations. First, the tax rates adopted by different countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest, severely hurt their growth performance. In our model, the effects of taxation on growth are highly non-linear. Low or moderate tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth difficult to measure empirically.

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This paper was revised on April 22, 2015

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Document Object Identifier (DOI): 10.3386/w18473

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