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Capital Income Taxation and Economic Growth in Open Economies

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  • Geremia Palomba
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    Abstract

    Do reductions in capital income taxes attract foreign capital and, at the same time, foster economic growth? This paper examines the effect of capital income taxation on the international allocation of capital and on economic growth in a two-country overlapping generations model with endogenous growth and internationally mobile capital. It shows that domestic capital taxes affect both the international allocation of capital and the rate of economic growth and that these two effects are not necessarily the same. A country can increase its share of the existing world capital by changing its taxes but, depending on the elasticity of saving to after-tax returns, this may reduce the rate of capital accumulation and economic growth.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/91.

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    Length: 28
    Date of creation: 01 May 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/91

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    Related research

    Keywords: Income taxes; Economic growth; Economic models; capital accumulation; capital income; domestic taxes; capital income taxation; capital market; foreign capital; capital mobility; capital taxes; domestic capital; domestic tax; tax competition; capital taxation; tax change; capital stock; world capital market; domestic taxation; international tax; capital ratio; international taxation; taxes on capital; tax reforms; international capital; cost of capital; foreign tax rates; tax return; lump-sum taxation; capital tax; national taxes; foreign tax; capital inflow; optimal tax; taxes on domestic; optimal taxation approach; property taxation; capital flow; lump-sum tax; optimal taxation; effect of taxation; effects of taxation; income effect; tax journal; capital owners; tax rates on capital; international tax competition; national tax journal; capital gains; lump-sum taxes; capital flows; tax reduction; foreign taxes; tax reductions; substitution effect; tax harmonization;

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    1. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    2. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
    3. Grossman, G.M. & Helpman, E., 1993. "Endogenous, Innovation in the Theory of Growth," Papers 165, Princeton, Woodrow Wilson School - Public and International Affairs.
    4. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
    5. 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.
    6. Bayoumi, T. & Coe, D.T. & Helpman, E., 1996. "R&D Spillovers and Global Growth," Papers 14-96, Tel Aviv.
    7. Ghosh, A.R., 1990. "Strtegic Aspects Of Public Finance In A World With High Capital Mobility," Papers 49, Princeton, Woodrow Wilson School - Discussion Paper.
    8. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
    9. D Leahy & J.P. Neary, 1997. "R&D Spillovers and the Case for Industrial Policy in an Open Economy," CEP Discussion Papers dp0345, Centre for Economic Performance, LSE.
    10. Assaf Razin & Chi-Wa Yuen, 1994. "Convergence in Growth Rates: The Role of Capital Mobility and International Taxation," NBER Working Papers 4214, National Bureau of Economic Research, Inc.
    11. 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.
    12. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    13. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    14. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
    15. Asea, Patrick K. & Turnovsky, Stephen J., 1998. "Capital income taxation and risk-taking in a small open economy," Journal of Public Economics, Elsevier, vol. 68(1), pages 55-90, April.
    16. Jiming Ha & Anne Sibert, 1992. "Strategic capital taxation in large, open economies with mobile capital," Research Working Paper 92-01, Federal Reserve Bank of Kansas City.
    17. Arjan Lejour & Harrie Verbon, 1997. "Tax Competition and Redistribution in a Two-Country Endogenous-Growth Model," International Tax and Public Finance, Springer, vol. 4(4), pages 485-497, November.
    18. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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