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Capital taxation, investment, growth, and welfare

Author

Listed:
  • Simon Bösenberg

    (Swiss National Bank)

  • Peter Egger

    (ETH Zurich, KOF
    CESifo, CEPR, NoCeT, Oxford University Centre for Business Taxation (OUCBT))

  • Benedikt Zoller-Rydzek

    (ETH Zurich, KOF)

Abstract

This paper formulates a model of economic growth to study the effects of broad capital taxation (of profits, dividends, and capital gains) on macroeconomic outcomes in small open economies. A framework of exogenous growth permits modeling countries in transition to a country-specific steady state and to discern steady-state and transitory effects of shocks on economic outcomes. The chosen framework is amenable to structural estimation and, in view of the parsimony of the model, fits data on 79 countries over the period 1996–2011 well. The counterfactual analysis based on the estimated model suggests that capital-tax reductions induce positive effects on output and the capital stock (per unit of effective labor) that are economically significant and are accommodated within time windows of 5 years without much further economic response after that. The responses of economic aggregates are found to be relatively strongest to changes in corporate-profit-tax rates and weaker for dividend and capital-gains taxes.

Suggested Citation

  • Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9454-3
    DOI: 10.1007/s10797-017-9454-3
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    3. Egger, Peter H. & Erhardt, Katharina & Keuschnigg, Christian, 2020. "Heterogeneous tax sensitivity of firm-level investments," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 512-538.
    4. Egger, Peter H. & Strecker, Nora M. & Zoller-Rydzek, Benedikt, 2020. "Estimating bargaining-related tax advantages of multinational firms," Journal of International Economics, Elsevier, vol. 122(C).
    5. Thomas Goda & Sebastián Ballesteros,, 2020. "The impact of effective corporate tax rates on investment," Documentos de Trabajo de Valor Público 18212, Universidad EAFIT.
    6. Donadelli, Michael & Jüppner, Marcus & Prosperi, Lorenzo, 2019. "Risk weighting, private lending and macroeconomic dynamics," Discussion Papers 30/2019, Deutsche Bundesbank.

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    More about this item

    Keywords

    Capital taxation; Corporate profit taxation; Dividend taxation; Capital-gains taxation; Open economy growth; Transition paths;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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