Endogenous Growth, Taxes and Government Spending: Theory and Evidence*

Abstract

This paper provides a theoretical and empirical investigation of the simultaneous effects of taxes and government spending on long-run economic growth in an endogenous growth framework. A two-sector model is considered: one sector produces physical output and the other produces human capital. Government expenditure is divided into several categories, and several types of taxes are included. The property tax is especially interesting because it is a major source of revenue for local government. The theoretical model is estimated using annual panel data from North Carolina counties. This study finds that state-level fiscal policies affect economic growth but county-level fiscal policies do not. . The author would like to thank John J. Seater, Michael L. Walden, Alastair Hall, and Charles Knoeber for helpful comments and suggestions and the anonymous referee for significant substantive comments.

U.S. State and Local Fiscal Policy and Economic Activity: Do We Know More Now?

“…Denaux () assessed the effects of state and local taxes on real per capita income growth in North Carolina counties for the period 1980–1995. Wooster and Lehner () examined the effect of the high sales tax in the state of Washington using real per capita retail sales data for its counties over the 1992–2006 period.…”

Affects Corporate Taxation Economic Growth? - Dynamic Approach for OECD Countries

“…Judd (1987) claims that it is desirable to estimate impact of all taxes on economic growth. Denaux (2007) or Izák (2011) add that it is also necessary to quantify impact of other fiscal variables, mainly government expenditures. Because of that, the model is extended by control of tax variables and government expenditures.…”

“…Denaux (2007) or Izák (2011) note that it is very important to include government expenditures to the models analysing impact of taxation to the economic growth as they represent one of the aspects of the taxation. With regard to the modern approach to taxation and economic growth (e.g.…”

Fiscal and Monetary Policies in a Transactions-Based Endogenous Growth Model with Imperfect Competition

“…Koester and Kormendi (), Ojede and Yamarik () and Ferede and Dahlby () do not detect a significant effect of income tax on output growth. Denaux () finds a positive relationship.…”