Abstract
The relationship between tax rates and the present value of tax collections is analyzed in an endogenous growth setting in which growth is driven by the accumulation of human capital. In such a model, income taxation may reduce the size of the tax base in current and future periods through both labor supply and growth rate effects. Under the benchmark parameterization of the model, the growth-reducing effects of taxation are found to have a moderate, but significant effect in lowering the revenue-maximizing rate of taxation relative to a static model.
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