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Financing social security by taxing capital income: A bad idea?

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  • Lars Kunze
  • Christiane Schuppert

Abstract

This paper examines the growth effects of an increase of capital income taxes if the additional revenue is devoted to cutting wage-related social security contributions to reduce unemployment. The analysis is carried out in an overlapping-generations model with endogenous growth, unemployment, and a social security system comprising pensions and unemployment benefits. It is shown that the reform not only promotes employment but may additionally stimulate economic growth. Calibrating the model to match data for the EU-15 reveals that European countries can indeed gain higher employment and growth if the initial capital income tax is not too high.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 66 (2010)
Issue (Month): 3 (September)
Pages: 243-262

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201009)66:3_243:fssbtc_2.0.tx_2-5

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Related research

Keywords: labor market; overlapping generations; social security; capital income taxation;

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  1. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  2. Bräuninger, Michael, 2004. "Social Security, Unemployment, and Growth," HWWA Discussion Papers 266, Hamburg Institute of International Economics (HWWA).
  3. Caballe, Jordi, 1998. "Growth Effects of Taxation under Altruism and Low Elasticity of Intertemporal Substitution," Economic Journal, Royal Economic Society, vol. 108(446), pages 92-104, January.
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