Working Paper Revision

Capital Gains Taxation and Investment Dynamics

Abstract: This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on firm size. We calibrate our model by targeting micro moments and a difference-in-differences estimate of the capital stock response based on the institutional setting and policy reform in Korea. We find that the reform that reduced the capital gains tax rates for a subset of firms substantially increased investment in the short run, and capturing general equilibrium price responses is important to quantify the long-run aggregate outcomes.

Keywords: Business Taxes and Subsidies; Capital; Saving and Capital Investment; Fiscal Policy; investment decisions;

JEL Classification: E22; E62; G11; H25; O16;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-12-12

Number: 2018-31

Note: On July 29, 2020, this paper was redacted from the Federal Reserve Bank of St. Louis Working Paper Series.

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