Capital taxation, long-run growth, and bequests

It has been shown that higher capital taxes can have a growth-enhancing effect when combined with a revenue-compensating cut in wage taxes or with an expansion in productivity-increasing public services. The present paper demonstrates that these results critically hinge on the existence of a bequest motive. It is shown that a wage-tax cut is no longer growth-enhancing when bequests are operative. By way of contrast, increasing productive public services may well boost growth. The theoretical findings are illustrated by numerical simulations based on US data.