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Short-run and long-run effects of capital taxation on innovation and economic growth

Ping-ho Chen, Angus Chu (), Hsun Chu () and Ching-chong Lai

Journal of Macroeconomics, 2017, vol. 53, issue C, 207-221

Abstract: In this study, we examine the effects of capital taxation on innovation and economic growth in an R&D-based growth model. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the short run, the consumption effect dominates the tax-shifting effect causing an initial negative effect of capital taxation on the equilibrium growth rates. However, in the long run, the tax-shifting effect becomes the dominant force yielding an overall positive effect of capital taxation on steady-state economic growth. These contrasting effects of capital taxation at different time horizons may provide a theoretical explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.

Keywords: Capital taxation; Economic growth; R&D; Transition dynamics (search for similar items in EconPapers)
JEL-codes: H20 O30 O40 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth (2016) Downloads
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Handle: RePEc:eee:jmacro:v:53:y:2017:i:c:p:207-221