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Financing Social Security by Taxing Capital Income – A Bad Idea?

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  • Lars Kunze

    ()

  • Christiane Schuppert

Abstract

This paper examines the growth effects of an increase of capital income taxes with additional revenue being devoted to cut wage-related social security contributions to reduce unemployment. The analysis is carried out in an overlapping generations model with endogenous growth, unemployment and a social security system comprising pensions and unemployment benefits. It is shown that the reform not only promotes employment but may additionally stimulate economic growth. Calibrating the model to match data for the EU15 reveals that European countries can indeed gain in form of higher employment and growth if the initial capital income tax is not too high.

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Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0090.

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Length: 27 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:rwi:repape:0090

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Keywords: Capital income taxation; social security; imperfect labor market; overlapping generations; growth;

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  1. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  2. Bräuninger, Michael, 2004. "Social Security, Unemployment, and Growth," HWWA Discussion Papers 266, Hamburg Institute of International Economics (HWWA).
  3. 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.
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