The effects of future taxes on economic growth will differ according to the mix of factors of production on which taxes are levied. Calculations of such effects change according to the factors on which taxes are levied (physical versus human capital); the magnitude of depreciation rates for both types of capital; the tax treatment of inputs in sectors producing human capital; and share parameters in input-producing sectors.
This paper examines quantitatively the implications of the current U.S. public debt-to-GDP ratio for economic growth. The analysis extends a general endogenous growth model to account for the Government’s solvency constraint. It finds that while further increases in the U.S. public debt may negatively affect long-run economic growth, the order of magnitude of such effects is likely to be rather small and is likely to be highest at debt-to-GDP ratios substantially higher than the current one (in the 200 to 250 percent range).
The effects of fiscal corrections on economic growth are derived by using alternative measures of the debt-to-GDP ratio, gross and net of approximate adjusted present values of social security liabilities. The results are of interest not only because, by providing bounds, they constitute a benchmark against which one can rule out some fiscal correction plans but also because of the sensitivity of growth effect calculations in nondebt settings.