GROWTH EFFECTS OF TAXATION UNDER ALTRUISM AND LOW ELASTICITY OF INTERTEMPORAL SUBSTITUTION

An increase in the tax rate on capital income may raise the rate of ec onomic growth when the elasticity of intertemporal substitution is low and intergenerational transfers are absent. Since the strength of the bequest motive depends on tax rates, this paper provides conditions u nder which taxing capital income, and then reducing the labour income tax, is more growth enhancing than the classical policy of zero taxes on capital income, and vice versa.