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Capital Income Taxation in a Growing Open Economy

  • Søren Bo Nielsen

    (Institute of Economics, University of Copenhagen)

  • Peter Birch Sørensen

    (Institute of Economics, University of Copenhagen)

The paper studies the dynamic macroeconomic effects of various forms of capital income taxation in a model of a small open economy with perfect mobility of financial capital and intertemporal optimization on the part of households and firms. One of the noteworthy results is that the introduction of a (low) corporate income tax will not affect consumption in the long run, but will simply lead to a replacement of shares by foreign financial assets in household portfolios. It is also found that an anticipated investment tax credit can have and that an anticipated dividend tax will have contractionary effects on investment before they are introduced. Moreover, it is shown that while an unanticipated dividend tax is neutral with respect to investment, it will have real effects on consumption and net foreign assets in a growing economy.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 89-14.

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Length: 26 pages
Date of creation: Jul 1989
Date of revision:
Publication status: Published in: European Economic Review, 1991, 35(1) pp 179-97
Handle: RePEc:kud:kuiedp:8914
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