On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture

In 1964 Harberger conjectured that, although theory predicts that changes in tax rates affect investment and growth in the long-run, in practice tax policy is an ineffective instrument to influence growth. This paper provides theoretical and empirical evidence in favor of this view. The growth effects of tax policy in the class of endogenous growth models driven by human capital accumulation are examined, and numerical simulations of these models confirm the results Harberger predicted. Cross-country panel regressions, estimated using a new method for measuring effective tax rates, produce significant investment effects from taxes that are consistent with negligible growth effects. These results are robust to the introduction of other growth determinants, (C) 1997 Elsevier Science S.A.