Dynamic Scoring: A Back-of-the-Envelope Guide
This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.
- In the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in...
Mankiw, N. Gregory and Matthew Weinzierl. "Dynamic Scoring: A Back-of-the-Envelope Guide," Journal of Public Economics, 2006, v90(8-9,Sep), 1415-1433. citation courtesy of