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Optimal Thin Capitalisation Rule in a Simple Endogenous Growth Model with Tax Havens
Author(s) -
Chu Hsun
Publication year - 2012
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2012.00427.x
Subject(s) - economics , microeconomics , incentive , welfare , consumption (sociology) , endogenous growth theory , public economics , general equilibrium theory , macroeconomics , monetary economics , market economy , social science , sociology , human capital
In this paper we study the optimal thin capitalisation rules by developing a simple dynamic general‐equilibrium growth model incorporating tax havens. It is found that a stricter thin capitalisation rule will reduce the incentive to invest, and is therefore harmful to growth. This effect is ignored in previous static studies on the welfare analysis of tax havens. Accordingly, when taking the growth effect into consideration, reducing the utilisation of tax havens has ambiguous effects on social welfare. We also show that a looser thin capitalisation rule could be favourable for the policymakers if (i) the production technology is high; (ii) the existing income tax rate is high; (iii) the rate of time preference is low; or (iv) the weight factor of public consumption in utility is small.