Ping-ho Chen, Angus C. Chu, Hsun Chu and Ching-chong Lai. "Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth". Journal of Macroeconomics , 2017.
Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth
Pig-ho Chen
Department of Economics, National Cheng Chi University
Angus C. Chu
China Center for Economic Studies, School of Economics, Fudan University
Hsun Chu
Department of Economics, Tunghai University
Ching-chong Lai
Institute of Economics, Academia Sinica
Department of Economics, National Cheng Chi University
Institute of Economics, National Sun Yat-Sen University
Department of Economics, Feng Chia University
Abstract:
In this study, we examine the effects of capital taxation on innovation and economic growth in an R&D-based growth model. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the short run, the consumption effect dominates the tax-shifting effect causing an initial negative effect of capital taxation on the equilibrium growth rates. However, in the long run, the tax-shifting effect becomes the dominant force yielding an overall positive effect of capital taxation on steady-state economic growth. These contrasting effects of capital taxation at different time horizons may provide a theoretical explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.
Keywords: Capital taxation; Economic growth; R&D; Transition dynamics
