Growth, Taxes, and Government Expenditures

Neil Bania (University of Oregon, Department of Planning, Public Policy & Management), Jo Anna Gray (University of Oregon, Department of Economics) & Joe A. Stone (University of Oregon, Department of Economics) have published Growth, Taxes, and Government Expenditures: Growth Hills for U.S. States, 60 Nat'l Tax J. 193 (2007).  Here is the abstract:

Barro–style models of endogenous growth imply that economic growth will initially rise with an increase in taxes directed toward economically "productive" expenditures (e.g., education,highways, public safety), but will subsequently decline—consistent with a "growth hill"—as the rising tax share depresses the net return to private capital. Previous tests focus on whether thelinear incremental effect of taxes is positive, negative, or zero, with substantial evidence for all three conclusions. This study incorporates potentially non–monotonic effects for fiscal policy. Based onestimates for U.S. states, the incremental effect of taxes directed toward publicly provided productive inputs is initially positive, but eventually turns negative, consistent with a growth hill.