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Economic Quarterly

Winter 1994

Two Perspectives on Growth and Taxes

Peter N. Ireland

Two growth models provide very different perspectives on the link between tax rates and macroeconomic performance. A model developed by Robert Solow predicts that changes in taxes affect the level, but not the growth rate, of aggregate output. A model that draws on the ideas of Frank Knight suggests, in contrast, that tax policy does help determine an economy’s long-run growth rate.

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