Macroeconomic Effects of Capital Tax Rate Changes

Purpose – Unsustainable levels of debt in some European economies are causing enormous strain in the Euro area. Successful debt consolidation in high-debt economies is the single most important objective for the European policy makers. The paper aims to discuss these issues. Design/methodology/approach – The author uses a dynamic general equilibrium closed economy model to compute the dynamic Laffer curves for Portugal, Ireland, Greece and Spain for different class of taxes. The general equilibrium effects of the interaction of labor tax, consumption tax and capital tax is demonstrated. Findings – Location of each economy on its Laffer curve suggests that there exists a scope for considerable revenue generation by raising consumption and labor tax rates but no such possibilities exist for capital tax rate. Thus revenue generation with certain tax rates as instruments, holds key to successful and sustained debt reduction. Originality/value – This to the best of knowledge is one of the first papers which looks closely at the tax revenue – tax rate panel for the major deeply indebted European economies.

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Tax Harmonization and Expenditure Competition among Self-interested Governments

Journal of Public Finance and Public Choice ◽

10.1332/251569204x15668904587106 ◽

2004 ◽

Vol 22 (1) ◽

pp. 33-52

Author(s):

Claudia Hensberg

Keyword(s):

Financial Incentive ◽

Tax Rates ◽

Tax Rate ◽

Public Input ◽

Tax Harmonization ◽

Capital Tax

Abstract In this paper the effect of tax harmonization on intergovernmental expenditure competition is analysed. To this end, it is assumed that self-interested governments cannot influence tax rates, since taxes are harmonized, but that they can freely choose expenditure policies and, by this, attract additional capital and broaden the assessment base of a capital tax. Hence, self-interested governments might have a financial incentive to provide for public input besides re-election oriented motivations. Since additional tax income from public input provision depends on the harmonized capital tax rate, the choice of the tax rate indirectly determines the amount of public input supplied by governments in expenditure competition.

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PRODUCTIVITY SHOCKS, FOREIGN DIRECT INVESTMENT, AND CAPITAL TAXES

Ekonomika ◽

10.15388/ekon.2014.93.5040 ◽

2015 ◽

Vol 93 (4) ◽

pp. 58-71

Author(s):

Aras Zirgulis

Keyword(s):

Foreign Direct Investment ◽

Direct Investment ◽

Foreign Competition ◽

Productivity Shocks ◽

Fdi Inflows ◽

Tax Rate ◽

Domestic Capital ◽

Capital Tax ◽

Model Evidence ◽

Dynamic Spatial Model

The present study deals with the effect that productivity and capital taxes have on foreign direct investment through a panel consisting of 41 countries utilising the GMM system on a dynamic spatial model. Evidence reveals that an increase in the domestic capital tax rate leads to less FDI inflows, and higher levels of domestic productivity growth lead to less FDI inflows. Foreign competition did not have a significant effect on domestic FDI inflows.

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Tax Competition and Asymmetric Countries

Ekonomika ◽

10.15388/ekon.2004.17396 ◽

2004 ◽

Vol 68 ◽

Author(s):

Anton Jevcak

Keyword(s):

Open Economy ◽

Small Open Economy ◽

National Income ◽

Tax Rates ◽

Tax Rate ◽

Eu Member States ◽

Public Inputs ◽

Tax Harmonisation ◽

Capital Tax ◽

The Government

This paper explores the consequences of a difference in the levels of public inputs accumulated over time in a small open economy model where capital tax revenues are used exclusively for the provision of public inputs, while the government sets the capital tax rate in way to maximise its country’s national income. It is shown that in this case the optimal capital tax rate in a country is a decreasing function of its stock of accumulated public inputs. The model thus implies that capital tax harmonisation could actually be detrimental to the so-called core EU member states as it could fix their capital tax rates at an in-optimally high levels and thus hinder their ability to dampen undesirable capital out- flows.

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OPTIMAL TAXATION AND SOCIAL NETWORKS

Macroeconomic Dynamics ◽

10.1017/s1365100513000096 ◽

2013 ◽

Vol 18 (8) ◽

pp. 1683-1712 ◽

Cited By ~ 3

Author(s):

Marcelo Arbex ◽

Dennis O'Dea

Keyword(s):

Social Network ◽

Labor Supply ◽

Job Search ◽

Income Tax ◽

Optimal Taxation ◽

Social Activities ◽

Employment Level ◽

Tax Rate ◽

Job Information ◽

Capital Tax

We study optimal taxation when jobs are found through a social network. The network determines employment, which workers may influence by engaging in social activities. The network parameters play an important role in determining the economy's employment level and the optimal income tax. The optimal labor income tax depends on both the traditional intensive margin of labor supply and a new extensive margin that depends on the structure of the social network. Social activities that promote social connections are instrumental to acquiring job information; taxation thus discourages both social activities and labor supply, reducing employment. Labor taxes vary positively with labor supply and negatively with employment. When networking is absent, taxes are higher and the economy's employment rate is lower. The optimal capital tax rate is zero, independent of labor market frictions. Social networking reduces job search frictions and is welfare-enhancing.

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Why Governments Should Tax Mobile Capital in the Presence of Unemployment

Contributions in Economic Analysis & Policy ◽

10.2202/1538-0645.1004 ◽

2002 ◽

Vol 1 (1) ◽

Cited By ~ 3

Author(s):

Erkki Koskela ◽

Ronnie Schöb

Keyword(s):

Open Economy ◽

Trade Unions ◽

Tax Reform ◽

Small Open Economy ◽

Elasticity Of Substitution ◽

Tax Rate ◽

Wage Moderation ◽

Mobile Capital ◽

Capital Tax ◽

The Government

Abstract This paper shows that a small open economy that suffers from involuntary unemployment should levy a positive source-based tax on capital income. A revenue-neutral tax reform that increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower the marginal cost of production, increase output, reduce unemployment, and increase domestic welfare as long as the labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, if the elasticity of substitution between capital and labour is above a critical value (which is itself below one). Finally, and importantly, independent of the size of the elasticity of substitution, the government can promote wage moderation and reduce unemployment by increasing the personal tax credit of employed workers instead of reducing the labour tax rate.

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Federalism with Bicameralism

German Economic Review ◽

10.1111/geer.12046 ◽

2015 ◽

Vol 16 (2) ◽

pp. 138-160 ◽

Cited By ~ 1

Author(s):

Lisa Grazzini ◽

Alessandro Petretto

Keyword(s):

Fiscal Policies ◽

Tax Rate ◽

National Capital ◽

Capital Tax

Abstract We analyse how bicameralism can affect national fiscal policies in a federal country when vertical and horizontal externalities interact. Conditions are provided to show when, at equilibrium, the two chambers agree or disagree on the choice of a national capital tax rate, depending on whether or not the pivotal voter in the two chambers is the same.

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DYNAMICS OF TAXES, PUBLIC SERVICES, AND ENDOGENOUS GROWTH

Macroeconomic Dynamics ◽

10.1017/s1365100502031012 ◽

2002 ◽

Vol 6 (2) ◽

pp. 187-201 ◽

Cited By ~ 17

Author(s):

Hyun Park ◽

Apostolis Philippopoulos

Keyword(s):

Endogenous Growth ◽

Tax Rate ◽

Long Run ◽

Public Consumption ◽

Finance Model ◽

Optimal Policies ◽

Capital Tax ◽

Balanced Growth Path ◽

Public Production ◽

Long Run Equilibrium

We present a model of endogenous growth in which government consumption and production services are financed by distorting capital taxes. We generalize Barro's public finance model of growth in two ways. First, we study the properties, and the role in growth, of a wider menu of second-best optimal policies, namely, the capital tax rate and the portion of total tax revenues used to finance public production services versus public consumption services. Second, we investigate the possibility of the existence and uniqueness of a long-run equilibrium in which optimal policies do not change and the economy grows at a constant balanced growth path, as well as the possibility of dynamic determinacy of this long-run equilibrium.

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Optimal capital taxation in an economy with innovation-driven growth

Macroeconomic Dynamics ◽

10.1017/s1365100521000547 ◽

2021 ◽

pp. 1-34

Author(s):

Ping-Ho Chen ◽

Angus C. Chu ◽

Hsun Chu ◽

Ching-Chong Lai

Keyword(s):

Growth Model ◽

Creative Destruction ◽

Capital Taxation ◽

Tax Rate ◽

Us Economy ◽

The Us ◽

Capital Tax ◽

Optimal Capital

Abstract This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

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