Transcript Cross-Border Flow of People, Technology diffusion and

TAXES AND LONG-RUN ECONOMIC GROWTH:
CAN TAX REFORM RAISE “THE SPEED LIMIT” IN DENMARK?
Carl-Johan Dalgaard
NORDIC TAX ECONOMIST MEETING
OCTOBER 1 2012
THREE ISSUES:
• WHAT IS THE MAIN ENGINE OF LONG-RUN GROWTH?
• HOW DOES TAXES AFFECT LONG-RUN GROWTH?
• THOUGHTS ON TAXES AND THE SCOPE FOR A PRODUCTIVITY
ACCELERATIONS IN DENMARK
THREE POINTS:
• TOTAL FACTOR PRODUCTIVITY
• FIRM DYNAMICS AND TRANSFER OF IDEAS
• ONE FOCUS AREA: TRADE
WHAT IS THE MAIN ENGINE OF LONG-RUN GROWTH?
GDP PER
WORK HOUR
PHYSICAL
CAPITAL
HUMAN
CAPITAL
Equipment;
plants; natural
capital
Schooling; health
(Total Factor)
PRODUCTIVITY
”Technology”;
Public goods
Obviously: Lots and lots of interdependence
QUANTITATIVE IMPORTANCE:
• About 2/3 of economic growth within rich nations is due to (total
factor) productivity
• 90% of the differences in growth rates (GDP per employed) across
countries is due to TFP
• Unpacking aggregate TFP
• Entry/ Exit & Selection of firms. Foundation: New ideas (from
abroad)
• Public goods provision (infrastructure; efficient bureaucracy; Public
R&D)
HOW TAXES AFFECT LONG-RUN GROWTH
• Potential direct impact on Total factor productivity
• The ”Dark side” of taxes: Reduces transfer of ideas.
• Reduces foreign exposure and affects firm selection (e.g., tariffs). Limits
access and exposure to new ideas.
• Reduces the incentive to become (self-) employed (income tax).Introduction
of new ideas; new firms.
• Increases the costs of capital (corporate tax; cap gains tax). Introduction of
new ideas embedded in capital equipment
• Limits firm exit (subsidies)
• The ”Lighter side” of taxes: What taxes help finance.
• Supply of public goods (e.g., infrastructure; bureacratic efficiency; Public
R&D)
• Insurance: Social security reduces the potential ”downside” from being selfemployed
½
• Theory (e.g., Barro, 1990): Non-linear impact from tax system
• Empirics?
Income; property;
profits; trade
• In practise it appears that the net impact from tax and expenditures has been near
zero in most OECD countries 1970 -> (Gemmel et al, 2011)
•Bottom line: Composition of taxes (and expenditures) is key
THOUGHTS ON TAXES AND THE SCOPE FOR A PRODUCTIVITY
ACCELERATIONS IN DENMARK
• Before we get started … humility
• Two world wars; the demographic transition; the great depression; from agriculture to industry; mass
education; stagflation; increasing female labor market participation. 2 percent per annum.
0.60
0.60
0.55
0.55
0.50
0.50
Hourly productivity, Denmark relative to US,
1970-2009.
Souece: Penn World Tables 7.0
2005
0.65
2000
0.65
1995
0.70
1990
0.70
1985
0.75
1980
0.75
1975
0.80
1970
0.80
2005
0.85
2000
0.85
1995
0.90
1990
0.90
1985
0.95
1980
0.95
1975
1.00
1970
1.00
Hourly productivity: EU G7/USA, 1970-2009
(black); DEU/USA, 1970-2009 (green).
Note: (a) G7 is DEU, UK, FRA, ITA. Data: Penn World
Tables 7.0.
• Reignite the convergence process. Will admit a temporary growth
acceleration.
• Academic literature: Temporary acceleration in growth (10 yrs av).
Robust finding: TFP changes; Trade changes (i.e., Imp + Exp / GDP)
• International interaction does spur productivity; influences transfer
of ideas and thereby entry/exit and selection
• One focus area: Tariff (and non-tariff) barriers on trade in goods
and services
• Suggestive evidence of link between international interaction and growth: Case of
Singapore
0.80
100
Trade in services, Singapore
0.70
90
0.60
80
0.50
0.40
70
0.30
Time produktivitet, SGP/US
0.20
60
50
2005
2000
1995
1990
1985
1980
40
1975
2005
2000
1995
1990
1985
1980
1975
1970
0.00
1970
0.10
• Non-tariff Barriers. Francois og Hoekmann on trade restrictions
on services (JEL, 2010, p. 662): “…the indexes […] also point to
generally higher restrictions in developing countries than in the
OECD. At the same time though, some OECD countries (Australia,
Canada, and Denmark, for example) have restrictions
comparable to the averages prevailing in major developing
country economies.” (my emphasis)
• Tariffs. Composition of tariffs (Nunn and Trefler, 2010)
• Bias in tariffs. Positive correlation means ”more protection” of more skill intensive
goods
•Source: Nunn og Trefler, 2010, Am. Ec. J. – macro. Note: Growth corrected for impact of investments and
human capital . The figure depicts the partial correlation between bias in tariffs and growth.
CONCLUDING REMARKS
• Key importance of TFP; firm dynamics and transfer of knowledge
• Taxes (and expenditures) likely influence this process.
Composition of tax and expenditures.
• Productivity accelerations seem to be associated with increased
international interaction
• Suggests a focus on tariffs and trade regulation. Structure of tariffs
might be more important than levels.
THANK YOU FOR YOUR ATTENTION