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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., 2010. "Factor income taxation and growth with increasing integration of world capital markets," MPRA Paper 21565, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:21565
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital mobility; Endogenous growth; Factor income taxation; Overlapping generations; Small open economy;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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