IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/21565.html
   My bibliography  Save this paper

Factor income taxation and growth with increasing integration of world capital markets

Author

Listed:
  • Ho, Wai Hong
  • Yang, C. C.

Abstract

In a closed economy, the infinite-horizon and the overlapping generations (OG) model prescribe diametrically opposite policies on factor taxation: the former argues that the growth-maximizing capital income tax rate should be set to zero, whereas the latter argues that it should be set as high as possible. This note investigates the issue by taking into account global capital market integration. We show that the long-run growth-maximizing capital income tax rate in a small open OG economy is decreasing as the economy's capital market is increasingly integrated with the rest of the world, and will be equal to zero as prescribed in the infinite-horizon model once the degree of integration becomes sufficiently high.

Suggested Citation

  • Ho, Wai Hong & Yang, C. C., 2010. "Factor income taxation and growth with increasing integration of world capital markets," MPRA Paper 21565, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:21565
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/21565/1/MPRA_paper_21565.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    2. Jones, Larry E. & Manuelli, Rodolfo E., 1992. "Finite lifetimes and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 171-197, December.
    3. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    4. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
    5. Correia, Isabel H., 1996. "Dynamic optimal taxation in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 691-708, April.
    6. Ho, Wai-Hong & Wang, Yong, 2007. "Factor income taxation and growth under asymmetric information," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 775-789, April.
    7. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    8. Nouriel Roubini & Mr. Gian M Milesi-Ferretti, 1994. "Taxation and Endogenous Growth in Open Economies," IMF Working Papers 1994/077, International Monetary Fund.
    9. 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.
    10. Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(5), pages 667-687, September.
    11. 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.
    12. Bretschger, Lucas & Hettich, Frank, 2002. "Globalisation, capital mobility and tax competition: theory and evidence for OECD countries," European Journal of Political Economy, Elsevier, vol. 18(4), pages 695-716, November.
    13. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ho, Wai-Hong & Wang, Yong, 2009. "Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market," MPRA Paper 17040, University Library of Munich, Germany.
    2. Ho, Wai-Hong & Wang, Yong, 2007. "Factor income taxation and growth under asymmetric information," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 775-789, April.
    3. Chen, Been-Lon, 2007. "Factor taxation and labor supply in a dynamic one-sector growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3941-3964, December.
    4. Wai-Hong Ho & Yong Wang, 2015. "Capital Income Taxation Revisited: The Roles of Information Friction and External Finance," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 225-242, May.
    5. Marrero, Gustavo A. & Novales, Alfonso, 2005. "Growth and welfare: Distorting versus non-distorting taxes," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 403-433, September.
    6. Pelloni, Alessandra & Waldmann, Robert, 2000. "Can waste improve welfare?," Journal of Public Economics, Elsevier, vol. 77(1), pages 45-79, July.
    7. Kunze, Lars, 2010. "Capital taxation, long-run growth, and bequests," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1067-1082, December.
    8. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3348-3369, October.
    9. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    10. Gian Maria Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," Working Papers 95-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    11. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
    12. Rivas, Luis A., 2003. "Income taxes, spending composition and long-run growth," European Economic Review, Elsevier, vol. 47(3), pages 477-503, June.
    13. Hyun Park, 2009. "Ramsey fiscal policy and endogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(3), pages 377-398, June.
    14. Nouriel Roubini & Gian Maria Milesi-Ferrett, 1994. "Taxation and Endogenous Growth in Open Economies," NBER Working Papers 4881, National Bureau of Economic Research, Inc.
    15. Cruz Echevarria & Amaia Iza, 2000. "Income Taxation and Finite Horizons in a Human Capital Model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 665-689, December.
    16. Chen, Ping-ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-chong, 2017. "Short-run and long-run effects of capital taxation on innovation and economic growth," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 207-221.
    17. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
    18. Gustavo A. Marrero & Alfonso Novales, 2003. "Taxing or subsidizing Factors' rents in a simple endogenous growth model with public capital," Documentos de Trabajo del ICAE 0303, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    19. Espino, Emilio & González Rozada, Martín, 2013. "Normative Fiscal Policy and Growth: Some Quantitative Implications for the Chilean Economy," IDB Publications (Working Papers) 4648, Inter-American Development Bank.

    More about this item

    Keywords

    Capital mobility; Endogenous growth; Factor income taxation; Overlapping generations; Small open economy;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:21565. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.