Capital Taxation, Long-Run Growth and Bequests

Abstract:     
It has been shown that higher capital taxes can have a growth-enhancing effect when combined with a revenue-compensating cut in wage taxes (Uhlig and Yanagawa 1996; European Economic Review 40, 1521–1540) or with an expansion in productivity-increasing public services (Rivas 2003; European Economic Review 47, 477–503). The present paper demonstrates that these results critically hinge on the existence of a bequest motive. It is shown that a wage-tax cut is no longer growth-enhancing when bequests are operative. By way of contrast, increasing productive public services may well boost growth. The theoretical findings are illustrated by numerical simulations based on US data.

Number of Pages in PDF File: 34

Keywords: Capital income taxation, public spending, overlapping generations, growth, family altruism

JEL Classification: D64, D91, H24, H50, O40

working papers series