Introduction to Modern Economic Growth institutional) differences might affect economic performance We can also note that similar results would be obtained if instead of taxes being imposed on returns from capital, they were imposed on the amount of investment (see next section) Naturally, we have not so far offered a reason why some countries may tax capital at a higher rate than others, which is again a topic that will be discussed later Before doing this, in the next section we will also discuss how large these effects can be and whether they could account for the differences in cross-country incomes 8.9 A Quantitative Evaluation As a final exercise, let us investigate whether the quantitative implications of the neoclassical growth model are reasonable For this purpose, consider a world consisting of a collection J of closed neoclassical economies (with all the caveats of ignoring technological, trade and financial linkages across countries, already dis- cussed in Chapter 3; see also Chapter 20) Suppose that each country j ∈ J admits a representative household with identical preferences, given by Z ∞ Cj1−θ − dt exp (−ρt) (8.38) 1−θ Let us assume that there is no population growth, so that cj is both total or per capita consumption Equation (8.38) imposes that all countries have the same discount rate ρ (see Exercise 8.16) All countries also have access to the same production technology given by the Cobb-Douglas production function (8.39) Yj = Kj1−α (AHj )α , with Hj representing the exogenously given stock of effective labor (human capital) The accumulation equation is K˙ j = Ij − δKj The only difference across countries is in the budget constraint for the representative household, which takes the form (8.40) (1 + τ j ) Ij + Cj ≤ Yj , 402