Federal Reserve Bank of St. Louis
Capital Gains Taxation and Investment Dynamics
This paper quantiﬁes the long-run eﬀects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous ﬁrms, which face discrete capital gains tax rates based on their ﬁrm size. We calibrate our model by targeting important micro moments as well as the diﬀerence-in-diﬀerences estimate of the capital elasticity based on our institutional setting in Korea. We ﬁnd that the ﬁrm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the aﬀected ﬁrms increased aggregate investment by 1.22 percent in the steady state, with the short-run eﬀects overstating the eﬀects by 1.18 percentage points. Additionally, a counterfactual analysis where we set the uniformly low tax rate of 10 percent reveals that aggregate investment rose by 7 percent in the long-run. We also ﬁnd that general equilibrium eﬀects through prices are substantial in our simulation. Taken together, our ﬁndings suggest that reducing capital gains tax rates would substantially increase investment in the short-term, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate eﬀects of capital gains taxes.
Cite this item
Sungki Hong & Terry S. Moon, Capital Gains Taxation and Investment Dynamics, Federal Reserve Bank of St. Louis, Working Papers 2018-31, 31 Oct 2018.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Keywords: Capital; Fiscal Policy; Investment Decisions; Business Taxes and Subsidies; Saving and Capital Investment
This item with handle RePEc:fip:fedlwp:2018-031
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