Non-linear Effects of Taxation on Growth

Nir Jaimovich and Sergio Rebelo
CQER Working Paper 13-02
April 2013

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We study a model in which the effects of taxation on growth are highly non-linear. Marginal increases in tax rates have a small growth impact when tax rates are low or moderate. When tax rates are high, further tax hikes have a large, negative impact on growth performance. We argue that this non-linearity is consistent with the empirical evidence on the effect of taxation and other disincentives to investment and innovation on economic growth.

JEL classification: H2, O4

Key words: growth, taxes

The authors thank Gadi Barlevy, Marco Bassetto, Martin Eichenbaum, Emmanuel Frahi, and Ben Jones for their comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Nir Jaimovich, Duke University and NBER, Duke University, Department of Economics, 213 Social Sciences Building, Durham, North Carolina 27708-0097, or Sergio Rebelo, Northwestern University, NBER and CPER, Kellogg School of Management, Leverone Hall, Evanston, Illinois 60208-2001,

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