Rising Allowances, Rising Rates: A Tinbergen Rule for Capital Taxation

Marius Clemens and Werner Röger

No 1986, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: The system of capital taxation consists of two instruments, namely a tax on profits and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade off prevails when each instrument is used individually. This is an application of the Tinbergen rule (Tinbergen 1952) to capital taxation. In the current context a fundamental requirement for this rule to work is that the two tax instruments imply different trade offs. As will be shown in the paper, depreciation allowances have a more favorable trade off between growth and net revenue in the long run compared to statutory profit tax rates. Thus, by increasing depreciation allowances and the statutory tax rate at the same time it is possible to both increase growth and fiscal space. In a model simulation calibrated to the German economy and tax system an increase of the tax depreciation rate for all investments from 10% to 25% leads to more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run the sign of the fiscal budget effect is determined by the assumption about indexation of government consumption to GDP. However, according to the Tinbergen rule for capital taxation slight adjustments of the capital tax rate could balance out these deficits and generate additional fiscal space.

Keywords: Fiscal Policy; Capital Allowance; Capital Tax (search for similar items in EconPapers)
JEL-codes: E61 E62 H25 (search for similar items in EconPapers)
Pages: 23 p.
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-his, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.diw.de/documents/publikationen/73/diw_01.c.831653.de/dp1986.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1986

Access Statistics for this paper

More papers in Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().