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Aggregate spillovers magnify the welfare benefits of tax reform

Author

Listed:
  • Todd A. Knoop
  • Kenneth J. Matheny

Abstract

Relatively small degrees of aggregate increasing returns to scale substantially magnify both welfare benefits and income effects associated with tax reform. External returns to scale of 10 per cent increase the welfare benefits of tax reform by roughly one-third and increase changes in income by significantly more than a model characterized by constant returns to scale. Aggregate spillovers of 20 per cent increase welfare benefits by roughly three-fourths. Aggregate spillovers significantly reduce tax revenue-maximizing capital tax rates. This research convincingly demonstrates the importance of precisely identifying the degree of aggregate returns to scale before the benefits of tax reform can be accurately assessed.

Suggested Citation

  • Todd A. Knoop & Kenneth J. Matheny, 2000. "Aggregate spillovers magnify the welfare benefits of tax reform," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 962-980, November.
    • Handle: RePEc:cje:issued:v:33:y:2000:i:4:p:962-980
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    Cited by:

    1. Alison Felix, 2007. "The incidence of capital taxation and the magnitude of its burden," Regional Research Working Paper RRWP 07-02, Federal Reserve Bank of Kansas City.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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