Ruhr Economic Papers

Ruhr Economic Papers #113

Capital Taxation, Long-run Growth, and Bequests

by Lars Kunze

TU Dortmund, 06/2009, 32 S./p., 8 Euro, ISBN 978-3-86788-126-5

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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.

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

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

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