Capital Income Taxation and Economic Growth in Open Economies
IMF Working Papers, May 1, 2004
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Bibliographic details
- Authors: Geremia Palomba
- Published: May 1, 2004
- Series: IMF Working Papers
Summary
- Research question: Do reductions in capital income taxes attract foreign capital and, at the same time, foster economic growth?
- Model: Two-country overlapping generations model with endogenous growth and internationally mobile capital.
- Core finding: Domestic capital taxes affect both the international allocation of capital and the rate of economic growth and these two effects are not necessarily the same.
Key findings
- A country can increase its share of the existing world capital by changing its taxes.
- Depending on the elasticity of saving to after-tax returns, a country that increases its share of world capital by changing taxes may reduce the rate of capital accumulation and economic growth.
- Domestic capital taxes influence:
- the international allocation of capital, and
- the rate of economic growth,
and these effects can diverge.
Policy implications / considerations
- Tax changes aimed at attracting foreign capital can have countervailing effects on long-run growth; policymakers should assess:
- the elasticity of saving to after-tax returns before implementing capital income tax cuts, and
- potential trade-offs between increasing a country’s share of world capital and sustaining capital accumulation and economic growth.