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Welfare Effects of Capital Taxation in a Small Open Economy

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  • Shuanglin Lin
  • Wei Zhang
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    Abstract

    In a small open economy, the welfare effect of capital taxation depends on the allocation of the tax revenue as well as the tax system. If tax revenues are used to finance debt or government spending, an increase in either residential or territorial capital taxation will reduce the welfare of the representative individual. If tax revenues are transferred intergenerationally, an increase in the residential capital tax rate will increase the steady-state welfare when the after-tax interest rate is greater than the growth rate. If the revenue is rebated to the tax payer, an introduction of territorial capital taxation may increase welfare when the growth rate is relatively high. In the case where either the revenue from residential capital taxation is rebated to the tax payer or the revenue from territorial capital taxation is transferred intergenerationally, the welfare-maximizing tax rate appears to be zero. Copyright Kluwer Academic Publishers 1998

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    File URL: http://hdl.handle.net/10.1023/A:1008240822015
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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 9 (1998)
    Issue (Month): 1 (January)
    Pages: 5-20

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    Handle: RePEc:kap:openec:v:9:y:1998:i:1:p:5-20

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    Web page: http://www.springerlink.com/link.asp?id=100323

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    Keywords: capital taxation; welfare; overlapping generations model; small open economy;

    References

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    1. Bovenberg, A.L., 1986. "Capital income taxation in growing open economies," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152946, Tilburg University.
    2. Diamond, Peter A., 1970. "Incidence of an interest income tax," Journal of Economic Theory, Elsevier, vol. 2(3), pages 211-224, September.
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    4. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    5. Ihori, Toshihiro, 1991. "Capital Income Taxation in a World Economy: A Territorial System versus a Residence System," Economic Journal, Royal Economic Society, vol. 101(407), pages 958-65, July.
    6. Rudiger Dornbusch, 1981. "Intergenerational and International Trade," NBER Working Papers 0792, National Bureau of Economic Research, Inc.
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    8. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
    9. Persson, Torsten, 1985. "Deficits and intergenerational welfare in open economies," Journal of International Economics, Elsevier, vol. 19(1-2), pages 67-84, August.
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    11. Batina, Raymond G. & Ihori, Toshihiro, 1991. "International spillover effects of consumption taxation," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 404-420, December.
    12. Kotlikoff, Laurence J & Summers, Lawrence H, 1979. "Tax Incidence in a Life Cycle Model with Variable Labor Supply," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 705-18, November.
    13. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    14. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    15. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
    16. Keen, Michael, 1990. "Welfare Effects of Capital Income Tax Reform in a Growing World Economy," Public Finance = Finances publiques, , vol. 45(2), pages 283-303.
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    Cited by:
    1. Leung, Charles, 2004. "Macroeconomics and housing: a review of the literature," Journal of Housing Economics, Elsevier, vol. 13(4), pages 249-267, December.

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