Non-linear E§ects of Taxation on Growth∗

We propose a model consistent with two observations. First, the tax rates adopted by di§erent countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest, severely hurt their growth performance. In our model, the e§ects of taxation on growth are highly non-linear. Low or moderate tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth di¢cult to measure empirically. J.E.L. Classification: H2, O4.