TAXATION AND ECONOMIC-GROWTH

Tax reforms are sometimes touted as having strong macroeconomic growth effects. Using three approaches, we consider the impact of a major ta x reform-a 5 percentage point cut in marginal tax rates-on long-term g rowth rates. The first approach is to examine the historical record of the U.S. economy to evaluate whether tax cuts have been associated wi th economic growth. The second is to consider the evidence on taxation and growth for a large sample of countries. And finally, we use evide nce from microlevel studies of labor supply, investment demand, and pr oductivity growth. Our results suggest modest effects, on the order of 0.2 to 0.3 percentage point differences in growth rates in response t o a major tax reform. Nevertheless, even such small effects can have a large cumulative impact on living standards.