Factor income taxation and growth with increasing integration of world capital markets

Wai-Hong Ho () and C.C. Yang

Economics Letters, 2013, vol. 120, issue 3, 477-480

Abstract: In a closed economy, the infinite-horizon and the overlapping generations (OG) model prescribe diametrically opposite policies on factor taxation: the former argues that the growth-maximizing capital income tax rate should be set to zero, whereas the latter argues that it should be set as high as possible. This note investigates the issue by taking into account global capital market integration. We show that the long-run growth-maximizing capital income tax rate in a small open OG economy is decreasing as the economy’s capital market is increasingly integrated with the rest of the world, and will be equal to zero as prescribed in the infinite-horizon model once the degree of integration becomes sufficiently high.

Keywords: Endogenous growth; Optimal taxation; Small open economy (search for similar items in EconPapers)
JEL-codes: H2 O4 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Factor income taxation and growth with increasing integration of world capital markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:120:y:2013:i:3:p:477-480

DOI: 10.1016/j.econlet.2013.05.024

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