Taxation, Government policy and the Economy

The main ways government spending/investments can spur growth by using tax money:

  1. Human Capital. If the taxation is going to improve human capital in ways such as job training or better education, this can enhance economic growth. The economic literature have found strong relationships between human capital and economic growth. The more educated the citizens are, the higher their Marginal product and the more innovation in the economy. Furthermore, proper education level will give citizens opportunities and knowledge that will enable them to become business owners, entrepeneurs, doctors, etc. As a result, they would also earn higher wages than they would have without, which will come back to society in the future with bigger tax payments. Furthermore, the reason government intervention is justified for education is also because of a market failure in the capital market for credit. Poor people would want to take a loan to invest in their future, but are not able to take loans for education purposes(especially early childhood or basic education) that are based on future income.

Which taxes do we have? and how can they hurt growth?:

  1. Decrease private investments. From the economic growth literature and the famous “Solow Model” of Nobel Laurette Robert Solow, it is mentioned that increasing the saving rate increases growth due the equation Savings=Investments. The famous “Asian Tigers” have experienced rapid growth while saving in very high rates and therefore investing in private investments that increased output. Decreasing the tax rates can increase savings and therefore, increase private investments and economic growth.

Since different taxes could have different effects, we will look at each tax and its direct effect separately(Without taking into account the effects from using its revenues).

  1. https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165 — Diamond and Saez optimal taxation
  2. https://www.cato.org/commentary/no-economists-dont-agree-70-percent-top-marginal-tax-rate-good-idea
  3. https://www.brookings.edu/research/who-would-benefit-most-from-free-college/
  4. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1324424 — allocation of talent — Lockwood
  5. https://dash.harvard.edu/bitstream/handle/1/8705900/AEJMacro.pdf?sequence... Corporate tax
  6. https://taxfoundation.org/corporate-tax-cut-economic-growth/
  7. https://freedom-dividend.com — Andrew Yang
  8. https://onlinelibrary.wiley.com/doi/abs/10.1111/joes.12037?identityKey=ed4e6b0d-55b8-441f-961a-
  9. 72ba8b6e74a3&regionCode=IE&isReportingDone=true&wol1URL=%2Fdoi%2F10.1111%2Fjoes.12037%2Fabstract — Infrastructure research
  10. https://eml.berkeley.edu//~saez/saez-slemrod-giertzJEL12.pdf — The Elasticity of Taxable Income with Respect to Marginal Tax Rates
  11. https://www.nytimes.com/2012/03/18/business/marginal-tax-rates-and-wishful-thinking-economic-view.html — Christina Romer
  12. https://www.btl.gov.il/English%20Homepage/Publications/Documents/mechkar_101E.pdf?TSPD_101_R0=08f4dd4423ab20007162e436fc9a2250e636a65139289fa1128dbac02a2eef02ee8ab77a4fd88991087172766c143000d0c84f8e3cc95361a0bd8fafd9bd93b13409949ec72f6c409ef0ec47f6f1648ebf2c80274920593883c6cf73b35e3294 — The Effect of Child Allowances on Fertility

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Economics student at Idc Herzliya

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Gilad Levin

Gilad Levin

Economics student at Idc Herzliya

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