DP760 Convergence in Growth Rates: The Role of Capital Mobility and International Taxation

Author(s): Assaf Razin, Chi-Wa Yuen
Publication Date: January 1993
Keyword(s): Capital Mobility, Economic Growth, Human Capital Accumulation, International Taxation, Population Growth
JEL(s): F21, F43, H21, J13, J22, J24, O41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=760

We consider the role of capital mobility and international taxation in explaining the observed diversity in long-term income growth rates. Under perfect capital mobility, international differences in taxes will not matter for total growth differentials. Policy differences have a role to play in per capita growth differentials, however, when they lead to a divergence in the after-tax rates of return on capital across countries, as when the residence principle is adopted universally. When this is the case, how tax differences affect the growth rates of population and human capital will depend on the relative preference of the individual household towards these two engines of growth. Optimal tax policies are found to be growth-equalizing with and without policy coordination.