It is widely believed that fiscal policy plays an important role in determining economic growth, but the specific policies that would best foster growth are hotly debated. This study provides a review of the recent economic literature that examines the effect of government fiscal policy actions on economic growth. Because the effect of changes in tax and spending programs may take a long period of time to become evident, the findings of the studies reviewed here are based on data taken from across a large sample of countries. Despite the justifiable belief that fiscal policy does influence economic growth, interpreting the empirical evidence from aggregate cross-country data turns out to be less than straightforward. Even so, stepping back and considering the accumulated evidence reveals a robust conclusion from the data: Distortionary taxes on personal income or corporations have a strong negative effect on investment and, therefore, slow the rate of economic growth.
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