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

Ping-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

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