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Do Capital Income Tax Cuts Trickle Down?

Abstract

Reductions in the capital income tax rate generally stimulate investment. A higher capital stock, in turn, raises the marginal product of labor and the wage rate. Hence, it is often argued that cutting capital income taxes benefits capital owners and all workers. This result, however, depends on how government manages debt to maintain budget solvency. When productive public investment or transfers to liquidity-constrained workers are reduced, the trickle-down effect may not hold. This paper also demonstrates a well-known fallacy: tax liability changes are a poor proxy for welfare changes.

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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 07-A005.

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Length: 22 pages
Date of creation: May 2007
Handle: RePEc:sin:wpaper:07-a005
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Cited by:

  1. Moldovan, Ioana R., 2010. "Countercyclical taxes in a monopolistically competitive environment," European Economic Review, Elsevier, vol. 54(5), pages 692-717, July.
  2. Muriel Pucci & Bruno Tinel, 2010. "Réductions d'impôts et dette publique : un lien à ne pas occulter," Documents de travail du Centre d'Economie de la Sorbonne 10085, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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