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Factor income taxation and growth with increasing integration of world capital markets

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  • Ho, Wai-Hong
  • Yang, C.C.

Abstract

In a closed economy, the infinite-horizon and the overlapping generations (OG) model prescribe diametrically opposite policies on factor taxation: the former argues that the growth-maximizing capital income tax rate should be set to zero, whereas the latter argues that it should be set as high as possible. This note investigates the issue by taking into account global capital market integration. We show that the long-run growth-maximizing capital income tax rate in a small open OG economy is decreasing as the economy’s capital market is increasingly integrated with the rest of the world, and will be equal to zero as prescribed in the infinite-horizon model once the degree of integration becomes sufficiently high.

Suggested Citation

  • Ho, Wai-Hong & Yang, C.C., 2013. "Factor income taxation and growth with increasing integration of world capital markets," Economics Letters, Elsevier, vol. 120(3), pages 477-480.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:3:p:477-480
    DOI: 10.1016/j.econlet.2013.05.024
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    More about this item

    Keywords

    Endogenous growth; Optimal taxation; Small open economy;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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