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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. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
    2. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    3. Grossman, G.M. & Helpman, E., 1993. "Endogenous, Innovation in the Theory of Growth," Papers 165, Princeton, Woodrow Wilson School - Public and International Affairs.
    4. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December.
    5. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
    6. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
    7. 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.
    8. Assaf Razin & Efraim Sadka, 1989. "International Tax Competition and Gains from Tax Harmonization," NBER Working Papers 3152, National Bureau of Economic Research, Inc.
    9. repec:ner:tilbur:urn:nbn:nl:ui:12-152946 is not listed on IDEAS
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    16. 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.
    17. Bayoumi, Tamim & Coe, David T. & Helpman, Elhanan, 1999. "R&D spillovers and global growth," Journal of International Economics, Elsevier, vol. 47(2), pages 399-428, April.
    18. 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.
    19. 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.
    20. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
    21. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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