Public Policy and Economic Growth: Developing Neoclassical Implications / Robert G. King, Sergio Rebelo.

Format:

Book

Author/Creator:

King, Robert G.

Contributor:

National Bureau of Economic Research.

Rebelo, Sergio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3338.

NBER working paper series no. w3338

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Public Policy and Economic Growth

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1990.

Summary:

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.

Notes:

Print version record

April 1990.