Capital Taxation, Tobin’s q and Overlapping Generations

This study examines the effect of capital taxation on the long-term equilibrium in an intertemporal model, incorporating overlapping generations of the Blanchard-Weil type and value-maximizing firms with adjustment costs in investment. I demonstrate that an increase in capital taxation raises the steady-state expected lifetime utility of an agent born after the tax increase, provided the intergenerational redistribution effect achieved through lowering the rate of return is greater than that achieved through the tax revenue effect owing to the reduced capital-labour ratio, and that an increased ITC rate would not necessarily raise the steady-state lifetime utility of all agents.