Do Taxes Matter for Long-Run Growth? Harberger's Superneutrality Conjecture

IMF Working Papers, August 1, 1995

Source details

Canonical URL: Do Taxes Matter for Long-Run Growth? Harberger's Superneutrality Conjecture

Harberger’s superneutrality conjecture contends that, although in theory the mix of direct and indirect taxes affects investment and growth, in practice growth effects of taxation are negligible.
The paper provides evidence in support of this view by testing the predictions of endogenous growth models driven by human capital accumulation.
The theoretical analysis highlights implications of different taxes for growth and investment in these models.
The empirical work is based on cross-country regressions and numerical simulations, using a new methodology for estimating aggregate effective tax rates.
Results show significant investment effects from income and consumption taxes that are consistent with small growth effects.
The results are robust to the introduction of other growth determinants.

Focus: endogenous growth models driven by human capital accumulation.
Highlights: implications of different taxes (direct and indirect) for growth and investment within these models.
Central claim: the mix of direct and indirect taxes theoretically influences investment and growth, but practical growth effects are negligible (Harberger’s superneutrality conjecture).

Data and approach: cross-country regressions and numerical simulations.
Innovation: uses a new methodology for estimating aggregate effective tax rates.
Empirical focus: investment responses to income and consumption taxes and implications for long-run growth.

Findings: Significant investment effects from income and consumption taxes.
Interpretation: Investment effects are consistent with small growth effects.
Robustness: Results remain robust when other growth determinants are introduced.