GROWTH EFFECTS OF FLAT-RATE TAXES

Recent estimates of the potential growth effects of tax reform vary wi ldly, ranging from zero to eight percentage points. Using an endogenou s growth model, we assess which model features and parameter values ar e important for determining the quantitative impact of tax reform. We find that the critical parameters are factor shares, depreciation rate s, the elasticity of intertemporal substitution, and the elasticity of labor supply. The elasticities of substitution in production, on the other hand, are relatively unimportant. The quantitative estimates in several recent papers are compared with each other and with some of th e evidence from U.S. experience. We find that Robert Lucas's conclusio n, that tax reform would have little or no effect on the U.S. growth r ate, is theoretically robust and consistent with the evidence.