An Analysis the Effect of Capital Taxation on Allocation of Resources: A Dynamic Equilibrium Model Approach

The return of capital is fundamental to the intertemporal allocation of resources by changing the consumption behavior and capital accumulation over time. Taxation on return of capital increases the marginal product of capital, meaning that capital stock is lower than when capital is not taxed, which results decreased growth and welfare in steady state. This paper studies the impact of capital income taxation on capital stock, output and welfare in a dynamic optimization model. Theoretical and experimental results indicate that any attempt to decrease taxation on return of capital in Iran's economy, will be eventually reached to a higher capital formation, higher output and consumption per capita in the steady state. Finally, leads to higher welfare level in the steady state.