Convergence in Growth Rates: A Quantitative Assessment of the Role of Capital Mobility and International Taxation

Abstract

We provide an exploratory quantitative analysis of the role of capital mobility and international taxation in explaining the observed cross-country diversity in the long-run rates of growth of per capita and total incomes as well as the population growth rates. Corroborative evidence is found for the theoretical results on the convergence/divergence in long-term population, per capita and total income growth rates obtained in Razin and Yuen (1992). In particular, the data (and casual observations) show that (1) population growth and per capita income growth are negatively correlated across countries, (2) the total income growth rates are less variable than the per capita income growth rates across countries, and (3) asymmetry in capital income tax rates, coupled with the residence principle of international income taxation, can be an important source of cross-country differences in per capita income growth. Our computer simulations indicate that although the effects of liberalizing capital flows on long-run growth may not be all that sizable, the growth effects of changes in capital income tax rates can be tremendously bigger with than without capital mobility due to cross-border policy spillovers.