taxstructureandeconomicgrowth.docVIP

Tax Structure and Economic Growth Young Lee a and Roger H. Gordon b a Hanyang University, Seoul, Korea b University of California, San Diego, USA July 15, 2004 Abstract Past theoretical work predicts that higher corporate tax rates should decrease economic growth rates, while the effects of high personal tax rates are less clear. In this paper, we explore how tax policies in fact affect a country’s growth rate, using cross-country data during 1970-1997. We find that statutory corporate tax rates are significantly negatively correlated with cross-sectional differences in average economic growth rates, controlling for various other determinants of economic growth, and other standard tax variables. In fixed-effect regressions, we again find that increases in corporate tax rates lead to lower future growth rates within countries. The coefficient estimates suggest that a cut in the corporate tax rate by ten percentage points will raise the annual growth rate by one to two percentage points. Introduction During the past several decades, there has been an enormous amount of work in public finance documenting myriad ways in which taxes distort the allocation decisions of firms and individuals. In comparison, there has been much less work, at least in public finance, documenting effects of the tax structure on the economys overall growth rate. Of course, within a neoclassical framework, as in Solow (1970), growth simply depends on the accumulation of capital and labor, so that the existing empirical work studying tax effects on investment and labor supply do capture the relevant effects on growth. In this framework, however, there would be no effects of taxes on total factor productivity. The more recent literature on endogenous growth, however, suggests that positive externalities omitted from the traditional neoclassical models play an important role in explaining long-run growth. There could be a variety of possible sources of these externali