Two Perspectives on Growth and Taxes
نویسنده
چکیده
R obert Solow’s (1956) neoclassical model reigns as the standard theory of economic growth. The Solow model begins with the assumption that capital accumulation is subject to diminishing marginal returns. It attributes sustained growth in national income per capita to technological progress that proceeds at a constant, exogenously given rate. Thus, it is an exogenous growth model. Recently, economists have developed alternatives to the Solow model that build on Frank Knight’s (1944) earlier theory of economic growth. These economists follow Knight by adopting an all-encompassing definition of capital that accounts for improvements in land, human capital, and scientific knowledge as well as for physical capital. Again along with Knight, they argue that under this broad definition, capital accumulation should be subject to constant, rather than diminishing, marginal returns. In their models, sustained growth occurs even in the absence of exogenous technological change. Hence, these are endogenous growth models. This article presents versions of both the Solow model of exogenous growth and the Knightian model of endogenous growth. In doing so, it illustrates that the differences between these two models are more than purely technical ones; indeed, the differences are of great relevance to contemporary policy debate in the United States. Specifically, Section 1 shows that in the Solow model, a change in the rate of income taxation affects the level, but not the growth rate, of per-capita output. Section 2 demonstrates that in the Knightian model, in contrast, changes in tax rates do influence long-run growth.
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