TY  - JOUR
AU  - King,Robert G.
AU  - Rebelo,Sergio
TI  - Public Policy and Economic Growth:  Developing Neoclassical Implications
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3338
PY  - 1990
Y2  - April 1990
UR  - http://www.nber.org/papers/w3338
L1  - http://www.nber.org/papers/w3338.pdf
N1  - Author contact info:
Robert King
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-5941
E-Mail: rking@bu.edu

Sergio Rebelo
Northwestern University
Kellogg School of Management
Department of Finance
Leverone Hall
Evanston, IL  60208-2001
Tel: 847/467-2329
Fax: 847/491-5719
E-Mail: s-rebelo@northwestern.edu
AB  - Why do the countries of the world display considerable disparity in long term growth rates? This paper examines the hypothesis that the answer lies in differences in national public policies which affect the incentives that individuals have to accumulate capital in both its physical and human forms. Our analysis shows that these incentive effects can induce large difference in long run growth rates. Since many of the key tax rates are difficult to measure, our procedure is an indirect one We work within a calibrated, two sector endogenous growth model, which has its origins in the microeconomic literature on human capital formation. We show that national taxation can substantially affect long run growth rates. In particular, for small open economies with substantial capital mobility, national taxation can readily lead to "development traps" (in which countries stagnate or regress) or to "growth miracles" (in which countries shift from little growth to rapid expansion) This influence of taxation on the rate of economic growth has important welfare implications: in basic endogenous growth models, the welfare cost of a 10 % increase in the rate of income tax can be 40 times larger than in the basic neoclassical model.
ER  -