Fiscal policy, Laffer curves and economic growth

The doctoral dissertation consists of three essays on the topics of economic growth and fiscal policy.;The first essay lies in field of economic growth empirics. It is well-known that an economy will converge to its steady state, determined by a country's production factors including labor force, physical and human capital. Such 'conditional convergence' property stays in line with the neoclassical economic growth theory. I investigate how the physical resources allocated to education affect an economy's standard of living in steady state, as well as the speed of convergence towards the steady state. I find that human capital investment, either the time or physical input, plays a vital role in explaining cross-country income variations. Moreover, I propose a structural panel model to estimate the unobserved country-effects in a large cross-country sample. Empirical results suggest that the unobserved effect is closely tied to a country's income and human capital levels. This finding provides evidence in favor of the view that human capital strongly affects a country's technology adoption.;The next two essays contribute to the literature on Laffer curves and fiscal policy. The Laffer curve limits a government's ability to raise taxes by increasing tax rates because the tax-rate distortion will eventually dominate the revenues when tax rate is high. Standard literature computes Laffer curves under the assumption that government spending is not productive - tax revenues are either thrown into ocean or redistributed as lump-sum transfer payments. The purpose of the essays is to investigate how the shape of Laffer curves changes when I make the more realistic assumption that tax revenues yield benefits. I allow government spending to be productive and recalculate the Laffer curves for the US.;Two types of government spending are considered, utility-enhancing spending on public goods and investment spending which enhances productivity. In Chapter 3, I model the productive government spending as investment in public capital; in Chapter 4, the productive investment is modeled as subsidies to education, essentially subsidies to private investment in human capital. I demonstrate that productive government spending does affect the shape of Laffer curves. Both labor and capital tax Laffer curves have higher peaks which occur at larger tax rates when the government chooses to optimally allocate marginal tax revenue between public goods and productive investment, compared with those `traditional' Laffer curves with tax revenues allocated only to spending. Therefore, when governments use marginal tax revenues for productive purposes, they are able to collect more tax revenue than otherwise. Yet, whether or not the government should raise tax revenues by increasing tax rates depends on the implications for welfare, not for tax revenue.