Endogenous growth and the dynamic Laffer curve
Advocates of supply-side economics contend that at least some of the economies are on the negatively sloped portion of the well-publicized Laffer curve, so that a lowering of tax rates will increase tax revenue and, thereby, reduce fiscal deficits in the long run. The purpose of this paper is to provide a simple but fundamentally correct framework - in the context of a convex model of endogenous growth - within which this contention may be analysed. The central finding is that, in the Group of Seven (G7), the issue of the response of deficits to tax rate changes cannot be resolved unless the crowding-out and crowding-in aspects of government intervention are taken into account.
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