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Capital Income Taxation and Long Run Growth: New Perspectives

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  • Assaf Razin
  • Chi-Wa Yuen

Abstract

We study the effects of capital income taxation on long run growth in an endogenous growth framework with two distinguishing features: endogenous population and international capital mobility. Endogenizing population growth introduces a new channel for taxes to affect economic growth and enables us to discriminate the effects of taxes on total versus per capita income growth. Allowing for capital mobility in the open economy, we show how the effects of taxes on population growth and income growth across countries will vary in specific ways, depending on the international income tax regimes and the relative preference bias of people towards the 'quantity' and 'quality' of children. The numerical results based on our calibrated model for the G-7 also indicate that, although the effects of liberalizing capital flows on long run growth may not be very sizable, the growth effects of changes in capital income tax rates can be tremendously magnified by cross-border capital flows and cross-border spillovers of policy effects.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5028.

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Date of creation: Feb 1995
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Publication status: published as Journal of Public Economics, vol. 59, pp. 239-263, February 1996
Handle: RePEc:nbr:nberwo:5028

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  1. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512149, December.
  2. Barro, R.J. & Mankiw, N.G. & Sala-i-Martin, X., 1992. "Capital Mobility in Neoclassical Models of Growth," Papers, Yale - Economic Growth Center 655, Yale - Economic Growth Center.
  3. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 500-521, June.
  4. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(3), pages 468-96, June.
  5. Becker, Gary S & Lewis, H Gregg, 1973. "On the Interaction between the Quantity and Quality of Children," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(2), pages S279-88, Part II, .
  6. Rebelo, Sergio, 1991. "Growth in open economies," Policy Research Working Paper Series 799, The World Bank.
  7. Gary S. Becker & Kevin M. Murphy & Robert F. Tamura, 1990. "Human Capital, Fertility, and Economic Growth," NBER Working Papers 3414, National Bureau of Economic Research, Inc.
  8. Razin, Assaf & Yuen, Chi-Wa, 1993. "Convergence in Growth Rates: The Role of Capital Mobility and International Taxation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 760, C.E.P.R. Discussion Papers.
  9. Assaf Razin & Enrique G. Mendoza & Linda L. Tesa, 1993. "A Comparative Analysis of the Structure of Tax Systems in Industrial Countries," IMF Working Papers 93/14, International Monetary Fund.
  10. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
  11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  12. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
  13. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1086-1102, December.
  14. King, R.G. & Rebelo, S., 1988. "Public Policy And Economic Growth: Developing Neoclassical Implications," RCER Working Papers 225, University of Rochester - Center for Economic Research (RCER).
  15. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(2), pages S3-27, April.
  16. Kenneth L. Judd, 1984. "The Welfare Cost of Factor Taxation in a Perfect Foresight Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 643, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, American Economic Association, vol. 71(4), pages 533-44, September.
  18. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  20. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
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