Capital Gains Taxation and Investment Dynamics

Sung Ki Hong and Terry S. Moon

No 2018-31, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on firm size. We calibrate our model by targeting micro moments and a difference-in-differences estimate of the capital stock response based on the institutional setting and policy reform in Korea. We find that the reform that reduced the capital gains tax rates for a subset of firms substantially increased investment in the short run, and capturing general equilibrium price responses is important to quantify the long-run aggregate outcomes.

Keywords: Business Taxes and Subsidies; Capital; Saving and Capital Investment; Fiscal Policy; investment decisions (search for similar items in EconPapers)
JEL-codes: E22 E62 G11 H25 O16 (search for similar items in EconPapers)
Pages: 53
Date: 2018-10-31, Revised 2019-12-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Note: On July 29, 2020, this paper was redacted from the Federal Reserve Bank of St. Louis Working Paper Series.
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2018-031

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DOI: 10.20955/wp.2018.031

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