TAXES AND LONG-RUN ECONOMIC GROWTH: CAN TAX REFORM RAISE

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TAXES AND LONG-RUN ECONOMIC GROWTH CAN TAX
REFORM RAISE THE SPEED LIMIT IN DENMARK?
Carl-Johan Dalgaard NORDIC TAX ECONOMIST
MEETING OCTOBER 1 2012
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• THREE ISSUES
• WHAT IS THE MAIN ENGINE OF LONG-RUN GROWTH?
• HOW DOES TAXES AFFECT LONG-RUN GROWTH?
• THOUGHTS ON TAXES AND THE SCOPE FOR A
  PRODUCTIVITY ACCELERATIONS IN DENMARK

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• THREE POINTS
• TOTAL FACTOR PRODUCTIVITY
• FIRM DYNAMICS AND TRANSFER OF IDEAS
• ONE FOCUS AREA TRADE

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• WHAT IS THE MAIN ENGINE OF LONG-RUN GROWTH?

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GDP PER WORK HOUR
PHYSICAL CAPITAL
HUMAN CAPITAL
(Total Factor) PRODUCTIVITY
Equipment plants natural capital
Schooling health
Technology Public goods
Obviously Lots and lots of interdependence
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• QUANTITATIVE IMPORTANCE
• About 2/3 of economic growth within rich nations
  is due to (total factor) productivity
• 90 of the differences in growth rates (GDP per
  employed) across countries is due to TFP
• Unpacking aggregate TFP
• Entry/ Exit Selection of firms. Foundation New
  ideas (from abroad)
• Public goods provision (infrastructure efficient
  bureaucracy Public RD)

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• HOW TAXES AFFECT LONG-RUN GROWTH

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• Potential direct impact on Total factor
  productivity
• The Dark side of taxes Reduces transfer of
  ideas.
• Reduces foreign exposure and affects firm
  selection (e.g., tariffs). Limits access and
  exposure to new ideas.
• Reduces the incentive to become (self-) employed
  (income tax).Introduction of new ideas new
  firms.
• Increases the costs of capital (corporate tax
  cap gains tax). Introduction of new ideas
  embedded in capital equipment
• Limits firm exit (subsidies)
• The Lighter side of taxes What taxes help
  finance.
• Supply of public goods (e.g., infrastructure
  bureacratic efficiency Public RD)
• Insurance Social security reduces the potential
  downside from being self-employed

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½

• Theory (e.g., Barro, 1990) Non-linear impact
  from tax system
• Empirics?

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Income property profits trade
Defense health educationtransport
communication
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• In practise it appears that the net impact from
  tax and expenditures has been near zero in most
  OECD countries 1970 -gt (Gemmel et al, 2011)
• Bottom line Composition of taxes (and
  expenditures) is key

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• THOUGHTS ON TAXES AND THE SCOPE FOR A
  PRODUCTIVITY ACCELERATIONS IN DENMARK

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• Before we get started humility

• Two world wars the demographic transition the
  great depression from agriculture to industry
  mass education stagflation increasing female
  labor market participation. 2 percent per annum.

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Hourly productivity EU G7/USA, 1970-2009
(black) DEU/USA, 1970-2009 (green). Note (a) G7
is DEU, UK, FRA, ITA. Data Penn World Tables 7.0.
Hourly productivity, Denmark relative to US,
1970-2009. Souece Penn World Tables 7.0
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• Reignite the convergence process. Will admit a
  temporary growth acceleration.
• Academic literature Temporary acceleration in
  growth (10 yrs av). Robust finding TFP changes
  Trade changes (i.e., Imp Exp / GDP)
• International interaction does spur productivity
  influences transfer of ideas and thereby
  entry/exit and selection
• One focus area Tariff (and non-tariff) barriers
  on trade in goods and services

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• Suggestive evidence of link between
  international interaction and growth Case of
  Singapore

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• Non-tariff Barriers. Francois og Hoekmann on
  trade restrictions on services (JEL, 2010, p.
  662) the indexes also point to generally
  higher restrictions in developing countries than
  in the OECD. At the same time though, some OECD
  countries (Australia, Canada, and Denmark, for
  example) have restrictions comparable to the
  averages prevailing in major developing country
  economies. (my emphasis)
• Tariffs. Composition of tariffs (Nunn and
  Trefler, 2010)

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• Bias in tariffs. Positive correlation means
  more protection of more skill intensive goods

• Source Nunn og Trefler, 2010, Am. Ec. J.
  macro. Note Growth corrected for impact of
  investments and human capital . The figure
  depicts the partial correlation between bias in
  tariffs and growth.

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• CONCLUDING REMARKS

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• Key importance of TFP firm dynamics and transfer
  of knowledge
• Taxes (and expenditures) likely influence this
  process. Composition of tax and expenditures.
• Productivity accelerations seem to be associated
  with increased international interaction
• Suggests a focus on tariffs and trade regulation.
  Structure of tariffs might be more important than
  levels.

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• THANK YOU FOR YOUR ATTENTION