Taxation and technical change

Abstract

The growth of the US economy in the postwar period has been very rapid by historical standards. The rate of economic growth reached its maximum during the period 1960 to 1966. Growth rates have slowed substantially since 1966 and declined further since 1973. A major source of uncertainty in projections of the future of the US economy is whether patterns of growth will better conform to the rapid growth of the early 196Os, the more moderate growth of the late 1960s and early 1970s or the disappointing growth since 1973. The purpose of this paper is to consider the prospects for restoring moderate economic growth through tax policy. For this purpose the growth of output during the postwar period is decomposed into contributions of capital input, labor input and the rate of technical change. For the period 1948 to 1976 it is found that all three sources of economic growth are significant and must be considered in analyzing future growth potential. For the postwar period, capital input has made the most important contribution to the growth of output, technical change has been next most important, and labor input has been least important. Focusing on the period 1973 to 1976, one finds that the fall in the rate of economic growth has been due to a dramatic decline in the rate of technical change. Declines in the contributions of capital and labor input are much less significant in explaining the slowdown. The conclusion is that the future development of technology should be the primary focus of efforts to stimulate future US economic growth. Given the importance of technical change in future economic growth, an attempt is made to analyze the slowdown in the rate of technical change for the US economy as a whole in greater detail. For this purpose technical change during the