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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

MPRA Paper from University Library of Munich, Germany

Abstract: In this note, we examine the effects of capital taxation on innovation and economic growth. 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 long run, the tax-shifting effect dominates the consumption effect yielding an overall positive effect of capital taxation on steady-state economic growth. However, in the short run, the consumption effect becomes the dominant force causing an initial negative effect of capital taxation on the equilibrium growth rates. These contrasting effects of capital taxation at different time horizons may provide a plausible 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: H2 O3 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cse, nep-fdg, nep-gro, nep-ino, nep-pbe and nep-pub
Date: 2016-05
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Journal Article: Short-run and long-run effects of capital taxation on innovation and economic growth (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72211

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