Is capital taxation always harmful for economic growth?

We investigate theoretically and empirically the relationship between capital taxation and economic growth. Using a long cross-country panel data set going back to 1965 and employing a variety of econometric techniques, we document that greater reliance on capital taxation, measured in different ways, is not negatively associated with growth rates. Exploring potential heterogeneity in this relationship across countries, we find that capital taxation and growth rates tend to be positively related for developed countries, but for developing countries the relationship is in most cases statistically insignificant. To rationalize these empirical findings we propose a multi-country innovation-based growth model where innovations spill over from leading to lagging economies. In the context of this model we demonstrate that positive rates of capital taxation can increase the long-run growth rate in leading economies where the engine of growth is domestic innovation activity. However, this is not the case in lagging economies where growth is driven by imitation of existing innovations from the technology frontier.