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Capital Income Taxation and the Sustainability of Permanent Primary Deficits
Uhlig,H.F.H.V.S.
Uhlig,H.F.H.V.S.
Abstract
If a government imposes a tax on capital income, it may, as a result, lower the private rate of return on capital below the growth rate of an economy, thereby giving rise to the possibility of running a permanent deficit. Since, however, the before-tax rate of return and not the after-tax rate of return is relevant for judging the dynamical efficiency of the economy, the possibility of a permanent deficit does not by itself imply a possibility for a Pareto-improving redistribution of income. To examine this issue "step by step", we examine in general whether a government can run a deficit forever by rolling over its debt. Assuming the government to run a deficit in each period equal to a constant fraction of total output, we study several overlapping generations models, proceeding from endowment economies to neoclassical growth with a variable capital stock. We then introduce capital income taxation and show, for example, that permanent defcits are feasible in the case of a variable capital stock, provided the capital income tax is sufficiently high. We examine the welfare effects and discuss policy consequences.
Description
Pagination: 38
Date
1997
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Volume Title
Publisher
Macroeconomics
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11.pdf
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Keywords
income tax, deficit spending, SDG 8 - Decent Work and Economic Growth
Citation
Uhlig, H F H V S 1997 'Capital Income Taxation and the Sustainability of Permanent Primary Deficits' CentER Discussion Paper, vol. 1997-11, Macroeconomics, Tilburg.
License
info:eu-repo/semantics/restrictedAccess