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Rising Allowances, Rising Rates: A Tinbergen Rule for Capital Taxation

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  • Marius Clemens
  • Werner Röger

Abstract

The system of capital taxation consists of two instruments, namely a tax on profits and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade off prevails when each instrument is used individually. This is an application of the Tinbergen rule (Tinbergen 1952) to capital taxation. In the current context a fundamental requirement for this rule to work is that the two tax instruments imply different trade offs. As will be shown in the paper, depreciation allowances have a more favorable trade off between growth and net revenue in the long run compared to statutory profit tax rates. Thus, by increasing depreciation allowances and the statutory tax rate at the same time it is possible to both increase growth and fiscal space. In a model simulation calibrated to the German economy and tax system an increase of the tax depreciation rate for all investments from 10% to 25% leads to more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run the sign of the fiscal budget effect is determined by the assumption about indexation of government consumption to GDP. However, according to the Tinbergen rule for capital taxation slight adjustments of the capital tax rate could balance out these deficits and generate additional fiscal space.

Suggested Citation

  • Marius Clemens & Werner Röger, 2021. "Rising Allowances, Rising Rates: A Tinbergen Rule for Capital Taxation," Discussion Papers of DIW Berlin 1986, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1986
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.831653.de/dp1986.pdf
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    References listed on IDEAS

    as
    1. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    2. Wieland, Volker & Lieberknecht, Philipp, 2019. "On the Macroeconomic and Fiscal Effects of the Tax Cuts and Jobs Act," CEPR Discussion Papers 13629, C.E.P.R. Discussion Papers.
    3. Francesco Furno, 2021. "The Macroeconomic Effects of Corporate Tax Reforms," Papers 2111.12799, arXiv.org.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal Policy; Capital Allowance; Capital Tax;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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