DP9261 Non-linear Effects of Taxation on Growth

Author(s): Nir Jaimovich, Sérgio Rebelo
Publication Date: December 2012
Keyword(s): growth, taxes
JEL(s): H2, O4
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9261

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.