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Laffer Strikes Again: Dynamic Scoring of Capital Taxes

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  • Strulik, Holger
  • Trimborn, Timo

Abstract

We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-454.

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Length: 35 pages
Date of creation: Jul 2010
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Handle: RePEc:han:dpaper:dp-454

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Keywords: corporate taxation; capital gains; tax allowances; revenue estimation; Laffer curve; dynamic scoring;

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Citations

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Cited by:
  1. Oudheusden, P. van, 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.
  2. Strulik, Holger & Trimborn, Timo, 2011. "The Dark Side of Fiscal Stimulus," Hannover Economic Papers (HEP) dp-466, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Ritwik Banerjee, 2013. "An Evaluation of the Revenue side as a source of fiscal consolidation in high debt economies," Economics Working Papers 2013-23, School of Economics and Management, University of Aarhus.
  4. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.
  5. Megersa, kelbesa, 2014. "The laffer curve and the debt-growth link in low-income Sub-Saharan African economies," MPRA Paper 54362, University Library of Munich, Germany.
  6. Strulik, Holger & Trimborn, Timo, 2013. "The dark side of fiscal stimulus," Center for European, Governance and Economic Development Research Discussion Papers 150, University of Goettingen, Department of Economics.
  7. Holger Strulik & Timo Trimborn, 2014. "Natural disasters and macroeconomic performance: The role of residential investment," Center for European, Governance and Economic Development Research Discussion Papers 194, University of Goettingen, Department of Economics.

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