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Abstract

This paper examines the long-term effects of tax cuts on tax revenue in a model that allows for transitional dynamics. Whereas previous dynamic scoring models have assumed an exogenous, or given, growth rate, this paper changes the production function by altering the basic neoclassical Ramsey model in order to obtain endogenous growth. The transitional dynamics come from the inclusion of private and public capital as stock variables, rather than flow. The model in this paper is designed to find the revenue feedback effects from reductions in the capital tax rate. The study uses this model to explore the possibility of "feasible tax cuts": those which would generate sufficient revenue feedbacks from increased economic growth to compensate for the initial revenue loss. These are measured as having feedback effects equal to the present value of future exogenous government expenditure. This study finds that a range of feasible capital tax cuts is able to exist in an economy with an optimal fiscal environment.

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