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Financing Social Security by Taxing Capital Income – A Bad Idea?

  • Lars Kunze

    ()

  • Christiane Schuppert

This paper examines the growth effects of an increase of capital income taxes with additional revenue being devoted to cut wage-related social security contributions to reduce unemployment. The analysis is carried out in an overlapping generations model with endogenous growth, unemployment and a social security system comprising pensions and unemployment benefits. It is shown that the reform not only promotes employment but may additionally stimulate economic growth. Calibrating the model to match data for the EU15 reveals that European countries can indeed gain in form of higher employment and growth if the initial capital income tax is not too high.

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File URL: http://repec.rwi-essen.de/files/REP_09_090.pdf
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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0090.

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Length: 27 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:rwi:repape:0090
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  1. Michaelis, Jochen & Birk, Angela, 2004. "Employment and Growth Effects of Tax Reforms," HWWA Discussion Papers 283, Hamburg Institute of International Economics (HWWA).
  2. Wendner, Ronald, 2001. "An applied dynamic general equilibrium model of environmental tax reforms and pension policy," Journal of Policy Modeling, Elsevier, vol. 23(1), pages 25-50, January.
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  6. Francesco Daveri & Guido Tabellini, . "Unemployment, Growth and Taxation in Industrial Countries," Working Papers 122, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Sheng-Cheng Hu, 1996. "Myopia and Social Security Financing," Public Finance Review, , vol. 24(3), pages 319-348, July.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, June.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. Lopez-Garcia, Miguel-Angel, 1996. "Consumption and Income as Tax Bases for Social Security," Public Finance = Finances publiques, , vol. 51(1), pages 54-70.
  11. Corneo, Giacomo & Marquardt, Marko, 2000. "Public pensions, unemployment insurance, and growth," Journal of Public Economics, Elsevier, vol. 75(2), pages 293-311, February.
  12. Tetsuo Ono, 2005. "Environmental-tax financed Social Security Tax Cuts and the Double Dividend," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(2), pages 178-, July.
  13. Shuanglin Lin & Xiaowen Tian, 2003. "Population growth and social security financing," Journal of Population Economics, Springer;European Society for Population Economics, vol. 16(1), pages 91-110, 02.
  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. Rivas, Luis A., 2003. "Income taxes, spending composition and long-run growth," European Economic Review, Elsevier, vol. 47(3), pages 477-503, June.
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