Topic: Capital Income Taxation and Self-fulfilling Aggregate Instability
Lecturer: Jianpo XUE, Professor, The Wang Yannan Institute for Studies in Economics, Xiamen University
Time: 10:40-11:40 a.m. November 15th, 2019 (Friday)
Venue: B219, Zhixin Building
Abstract: We propose a theory of self-ful?lling instability induced by capital income taxation. In a neoclassical economy with constant returns where the government adjusts capital tax rates to ensure fiscal sustainability, interaction between capital tax and utilization rates generates fiscal increasing returns and factor share redistribution to induce multiple equilibria. Self-fulfilling instability can occur in real-world economies, unless their depreciation allowances are sufficiently higher or tax rates lower than the current levels. Besides providing a novel and policy-based microfoundation for aggregate increasing returns, our results add a short-run motivation to the long-run approach to capital taxation calling for lower tax rates.