Capital Income Taxation and Economic Growth in Open Economies Prepared by Geremia Palomba*

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. describe research in progress by the author(s) and are published to elicit comments and to further debate. Do reductions in capital income taxes attract foreign capital and, at the same time, foster economic growth? This paper examines the effect of capital income taxation on the international allocation of capital and on economic growth in a two-country overlapping generations model with endogenous growth and internationally mobile capital. It shows that domestic capital taxes affect both the international allocation of capital and the rate of economic growth and that these two effects are not necessarily the same. A country can increase its share of the existing world capital by changing its taxes but, depending on the elasticity of saving to after-tax returns, this may reduce the rate of capital accumulation an