Increasing the capital income tax may lead to faster growth

According to conventional economic wisdom, capital income taxes should be low. The purpose of this paper is to cast doubt on this general conclusion and to show theft theory can also point in the opposite direction. The paper shows that under rather mild conditions, higher capital income taxes lead to faster growth in an overlapping generations economy with endogenous growth. Government expenditures are fixed as a fraction of GNP and are financed with labor income taxes as well as capital income taxes. Since capital income accrues to the old, taxing it reliefs the tax burdeq on the young and leaves them with more income out of which to save. The net effect o.q savings is positive, if the interest elasticity of savings is sufficiently low, which it seems to be according to several estimates found in the literature. The basic argument is not seriously challenged by a grandfather clause for initial capital or by the old receiving some labor income as well. Extending the model to allow for multiple periods of lives, however, can overturn our results and support the conventional wisdtna instead. JEL classification: H2h H23: E62; E21; E22; E25