Research Phase 10

Capital Taxation, Investment, Growth, and Welfare
Peter Egger, Simon Bösenberg and Benedikt Rydzek

This paper formulates a model of economic growth to study the effects of broad capital taxation (of profits, dividends, and capital gains)
on macroeconomic outcomes in small open economies. A framework of exogenous growth permits modeling countries in transition to
a country-specific steady state and to discern steady-state and transitory effects of shocks on economic outcomes. The chosen
framework is amenable to structural estimation and, in view of the parsimony of the model, fits data on 79 countries over the period
1996-2011 well. The counterfactual analysis based on the estimated model suggests that capital-tax reductions induce positive effects
on output and the capital stock (per unit of effective labor) that are economically significant and are accommodated within time
windows of five years without much further economic response after that. The responses of economic aggregates are found to be
relatively strongest to changes in corporate profit tax rates and weaker for dividend and capital-gains taxes.


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