Taxation and long-run growth

A number of recent papers have investigated the growth effects of tax reforms in the context of neoclassical growth models with human capital. Growth effects were found to be large, but highly sensitive to parameter choices. This paper shows that growth effects are smaller and much less sensitive in models that generate realistic life-cycle behavior, which requires that households are finitely lived (but generations may be altruistically linked) and face diminishing point in time returns in human capital accumulation. Reasonable upper bounds for growth effects in such models are less than one third of some values reported in the literature. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: J24; O41.