Growth Effects of Flat-Rate Taxes

Recent estimates of the potential growth effects of tax reform vary wildly, ranging from zero to eight percentage points. Using an endogenous growth model, we assess which model features and parameter values are important for determining the quantitative impact of tax reform. We find that the critical parameters are factor shares, depreciation rates, the elasticity of intertemporal substitution, and the elasticity of labor supply. The elasticities of substitution in production, on the other hand, are relatively unimportant. The quantitative estimates in several recent papers are compared with each other and with some of the evidence from U.S. experience. We find that Robert Lucas's conclusion, that tax reform would have little or no effect on the U.S. growth rate, is theoretically robust and consistent with the evidence.