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Is Foreign-Owned Capital a Bad Thing to Tax?

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  • William Scarth
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    Abstract

    The aging population has raised at least two concerns about tax policy. First, taxes will need to be increased to cover higher public-pension and medical-care expenses when baby boomers have retired. Second, taxes can be cut in the meantime, as the government realizes the "fiscal dividend" that accompanies its debt reduction program (that has been motivated by the aging population development). This paper uses a simple endogenous growth analysis to examine these issues. It is assumed that sales tax increases are infeasible on political grounds. Two conclusions emerge: the income tax rate levied on domestic residents should be cut during the debt-reduction period, and the tax rate on foreigners whose capital is operating in Canada should be increased later on when the bulk of the baby boomers have retired.

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    File URL: http://socserv.mcmaster.ca/sedap/p/sedap214.pdf
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    Bibliographic Info

    Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 214.

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    Length: 25 pages
    Date of creation: Jun 2007
    Date of revision:
    Handle: RePEc:mcm:sedapp:214

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    Keywords: fiscal policy; endogenous growth; open economy;

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    1. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
    2. Milbourne, Ross, 1995. "Economic Growth and Convergence in Open Economies," Australian Economic Papers, Wiley Blackwell, vol. 34(65), pages 309-21, December.
    3. Turnovsky, Stephen J., 2002. "Knife-Edge Conditions And The Macrodynamics Of Small Open Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 307-335, April.
    4. J. B. Burbridge & W. M. Scarth, 1995. "Eliminating Interest Taxation and Tariffs: The Underpinnings for Recent Canadian Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 437-49, May.
    5. repec:cup:macdyn:v:6:y:2002:i:2:p:307-35 is not listed on IDEAS
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