Capital taxation, investment, growth, and welfare

Simon Bösenberg, Peter Egger and Benedikt Zoller-Rydzek

International Tax and Public Finance, 2018, vol. 25, issue 2, No 2, 325-376

Abstract: Abstract This paper formulates a model of economic growth to study the effects of broad capital taxation (of profits, dividends, and capital gains) on macroeconomic outcomes in small open economies. A framework of exogenous growth permits modeling countries in transition to a country-specific steady state and to discern steady-state and transitory effects of shocks on economic outcomes. The chosen framework is amenable to structural estimation and, in view of the parsimony of the model, fits data on 79 countries over the period 1996–2011 well. The counterfactual analysis based on the estimated model suggests that capital-tax reductions induce positive effects on output and the capital stock (per unit of effective labor) that are economically significant and are accommodated within time windows of 5 years without much further economic response after that. The responses of economic aggregates are found to be relatively strongest to changes in corporate-profit-tax rates and weaker for dividend and capital-gains taxes.

Keywords: Capital taxation; Corporate profit taxation; Dividend taxation; Capital-gains taxation; Open economy growth; Transition paths (search for similar items in EconPapers)
JEL-codes: E22 F21 F43 H20 H25 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s10797-017-9454-3

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