Increasing the Capital Income Tax Leads to Faster Growth

H.F.H.V.S. Uhlig, N. Yanagawa

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    Abstract

    This paper shows that under rather mild conditions, higher capital income taxes lead to faster growth in an overlapping generations economy with endogenous growth. Government expenditures are financed with labor income taxes as well as capital income taxes. Since capital income accrues to the old, taxing it reliefs the tax burden on the young and leaves them with more income out of which to save. We argue that savings are sufficiently interest inelastic so that higher savings and therefore higher growth result. The basic argument is not seriously challenged by a grandfather clause for initial capital or by the old receiving some labor income as well.
    Original languageEnglish
    PublisherCentER
    Volume1994-115
    Publication statusPublished - 1994

    Publication series

    NameCentER Discussion Paper
    Volume1994-115

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