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In this note, we examine the e¤ects of capital taxation on innovation and economic growth. We …nd that capital taxation has drastically di¤erent e¤ects in the short run and in the long run. An increase in the capital income tax rate has both a consumption e¤ect and a tax-shifting e¤ect on the equilibrium growth rates of technology and output.In the long run, the tax-shifting e¤ect dominates the consumption e¤ect yielding an overall positive e¤ect of capital taxation on steady-state economic growth. However, in the short run, the consumption e¤ect becomes the dominant force causing an initial negative e¤ect of capital taxation on the equilibrium growth rates. These contrasting e¤ects of capital taxation at di¤erent time horizons may provide a plausible explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.

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In this paper we study the optimal thin capitalisation rules by developing a simple dynamic generalequilibrium 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.

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