How do tax rates affect economic growth?

In this paper, we focus on how tax changes affect economic growth. We focus on two types of tax changes – reductions in individual income tax rates and “income tax reform.” We define the latter as changes that broaden the income tax base and reduce statutory income tax rates, but nonetheless maintain the overall revenue levels and the distribution of tax burdens implied by the current income system. read more

For instance, income taxes redistribute income when the tax rates are progressive. High inequality is harmful for economic growth, and redistributive taxes help stabilize an economy. Pigouvian taxes deal with externalities, when the market price of a good excludes important costs that consumption of this good imposes on others. read more

Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes. read more