SFB 303 Discussion Paper No. A - 522
Author: Grüner, Hans Peter, and Burkhard Heer
Title: Should Capital be Taxed?
Abstract: We examine the transitional dynamics of Lucas' (1990) supply side
model of the US economy in order to specify the effects of capital
taxation on economic growth and welfare. We restrict the analysis to
policy plans characterized by constant capital taxes and demand the
government to maintain a balanced budget. Under these restrictions,
abandoning capital income taxation decreases welfare. It positively
affects generational welfare in the medium run, but not in the long
run. The optimal tax rate on capital is shown to be above its current
US level. Welfare can further be increased by the introduction of a tax
on asset holdings. Taking into account that capital taxation reduces
the need for redistribution and, hence, the size of the government
transfers, we show that capital taxes have significant positive growth
effects. This holds even for small values of both the elasticity of
labor supply and the elasticity of intertemporal substitution.
Keywords: Capital Taxation, Income Taxation, Inequality, Endogenous Growth,
Optimal Taxation
JEL-Classification-Number: E61, E62, H21, H23, O41
Creation-Date: May 1996
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