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Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth

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  • Chen, Ping-ho
  • Chu, Angus C.
  • Chu, Hsun
  • Lai, Ching-Chong

Abstract

In this note, we examine the effects of capital taxation on innovation and economic growth. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the long run, the tax-shifting effect dominates the consumption effect yielding an overall positive effect of capital taxation on steady-state economic growth. However, in the short run, the consumption effect becomes the dominant force causing an initial negative effect of capital taxation on the equilibrium growth rates. These contrasting effects of capital taxation at different time horizons may provide a plausible explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.

Suggested Citation

  • Chen, Ping-ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-Chong, 2016. "Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth," MPRA Paper 72211, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72211
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    3. José Laurindo de Almeida & Helder Ferreira de Mendonça, 2019. "The effect of infrastructure and taxation on economic growth: new empirical assessment," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(5), pages 1065-1082, August.
    4. Huang, Wei-Chi & Lai, Ching-Chong & Chen, Ping-Ho, 2017. "International R&D funding and patent collateral in an R&D-based growth model," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 545-561.
    5. Gechert, Sebastian & Heimberger, Philipp, 2022. "Do corporate tax cuts boost economic growth?," European Economic Review, Elsevier, vol. 147(C).
    6. Barbara Annicchiarico & Valentina Antonaroli & Alessandra Pelloni, 2022. "Optimal factor taxation in a scale free model of vertical innovation," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 794-830, April.
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    8. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2023. "The long‐run investment effect of taxation in OECD countries," Economica, London School of Economics and Political Science, vol. 90(358), pages 584-611, April.
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    10. Chu, Angus C. & Liao, Chih-Hsing & Peretto, Pietro, 2024. "Dynamic effects of taxation in an unequal Schumpeterian economy," MPRA Paper 122219, University Library of Munich, Germany.
    11. Wei‐Neng Wang & Chia‐Ying Liu & Juin‐Jen Chang, 2021. "Tax policy implications for a two‐engine growing economy," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 979-1009, January.

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    More about this item

    Keywords

    Capital taxation; economic growth; R&D; transition dynamics;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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