Do Capital Income Taxes Always Reduce Growth?

Abstract

Recent analyses have shown that a tax on income from capital may reduce long-term economic growth. However, in a multi-capital economy, taxation does not necessarily reduce long-term growth. If the accumulation of human capital generates positive externalities, this article shows that policies that favor human capital accumulation tend to raise the steady-state growth rate. Among other results, a rise in the tax on income from physical capital can lead to greater growth because it increases the relative attractiveness of investment in human capital. Further, in contrast to an infinite horizon, the OLG setting here permits analyzing the effects of intergenera tional transfer on growth. Transfer to the young also promotes growth.