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The Fiscal State-Dependent Effects of Capital Income Tax Cuts
Author:
Alexandra Fotiou null

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Ms. Wenyi Shen null

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Susan Yang Shu-Chun null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 071
Language:
English
Publication Date:
29 May 2020
DOI:
https://doi.org/10.5089/9781513545868.001
ISBN:
9781513545868
ISSN:
1018-5941
Pages:
54
Keywords:
WP; debt ratio; capital income tax effects; tax multiplier; fiscal policy effects; regime-switching models; non-linear DSGE model; income tax tax cut; income tax tax rate; cut effect; fiscal policy; rate data; tax revenue; capital income tax effect; cut increases government debt; output multiplier; Capital income tax; Fiscal consolidation; Corporate income tax; Consumption taxes
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund