Document Type

Working Paper

Publication Date

Winter 2-6-2010

Working Paper Number

2010-02

Abstract

This paper explores the dynamic behavior of a Romer-style endogenous growth model, analyzing how changes in tax rates affect government revenue in the short run and the long run. I show that in this environment lowering taxes on financial income is unlikely to stimulate tax revenue in the long run and has modest effects on the tax base, contrary to some other studies of the dynamic response of revenue to tax rates. Calibrations of the model that suggest Laffer curve effects can be substantial require implausibly low values for the elasticity of substitution between varieties of intermediate goods. For more plausible parameter values, I find that around 20% of a tax cut would be self-financing due to an expansion in the tax base.

Acknowledgements

Thanks to Chad Jones, Lorenz Kueng, Philippe Wingender, and seminar participants at Colgate University for comments.

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