This paper presents a framework for measuring how the structure of taxation and government spending affect output growth. It is shown that when countries are not following a steady-state growth path, static and dynamic distortions will affect output growth. In particular, taxes can affect output by; (1) reducing the marginal productivity of capital and labour, and (2) reducing the supply of capital and labour. The paper indicates that differences in tax policy can explain a substantial degree of variation in output growth among African countries. While measurement error and the potential for excluded variables suggest that the regression results be interpreted cautiously, the results imply that the structure, and not simply the level, of taxation can play an importantrole for encouraging growth in developing countries.
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