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Capital Income Taxation and Economic Growth in Open Economies

  • Geremia Palomba
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    Do reductions in capital income taxes attract foreign capital and, at the same time, foster economic growth? This paper examines the effect of capital income taxation on the international allocation of capital and on economic growth in a two-country overlapping generations model with endogenous growth and internationally mobile capital. It shows that domestic capital taxes affect both the international allocation of capital and the rate of economic growth and that these two effects are not necessarily the same. A country can increase its share of the existing world capital by changing its taxes but, depending on the elasticity of saving to after-tax returns, this may reduce the rate of capital accumulation and economic growth.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/91.

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    Length: 28
    Date of creation: 01 May 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/91
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    1. Jiming Ha & Anne Sibert,, 1996. "Strategic Capital Taxation in Large Open Economies with Mobile Capital," Archive Discussion Papers 9608, Birkbeck, Department of Economics, Mathematics & Statistics.
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    5. 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.
    6. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-97, August.
    7. Patrick Asea & Stephen Turnovsky, 1997. "Capital Income Taxation and Risk-Taking in a Small Open Economy," UCLA Economics Working Papers 768, UCLA Department of Economics.
    8. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
    9. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December.
    10. Razin, Assaf & Yuen, Chi-Wa, 1993. "Convergence in Growth Rates: The Role of Capital Mobility and International Taxation," CEPR Discussion Papers 760, C.E.P.R. Discussion Papers.
    11. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    12. Bovenberg, A.L., 1986. "Capital income taxation in growing open economies," Other publications TiSEM d92d32f6-df9f-418b-bbd3-d, Tilburg University, School of Economics and Management.
    13. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    14. Gene M. Grossman & Elhanan Helpman, 1994. "Endogenous Innovation in the Theory of Growth," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 23-44, Winter.
    15. Ghosh, Atish R., 1991. "Strategic aspects of public finance in a world with high capital mobility," Journal of International Economics, Elsevier, vol. 30(3-4), pages 229-247, May.
    16. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
    17. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    18. Leahy, Dermot & Neary, J Peter, 1999. "R&D Spillovers and the Case for Industrial Policy in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 40-59, January.
    19. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    20. Arjan Lejour & Harrie Verbon, 1997. "Tax Competition and Redistribution in a Two-Country Endogenous-Growth Model," International Tax and Public Finance, Springer, vol. 4(4), pages 485-497, November.
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