Effects of capital taxation on economies with different demographic changes: short term versus long term

We examine the effect of source-based capital taxation on capital accumulation in countries with endogenous fertility and free international capital mobility. When fertility is constant, a tax cut accelerates domestic capital accumulation through international arbitrage and exerts negative influences on the welfare of a foreign country. In contrast, with endogenous fertility, a tax cut by an economy with a higher tax rate and exporting capital may deter capital accumulation and hence lower the welfare in not only domestic but also foreign economies in the long term, although the tax cut may accelerate domestic capital accumulation in the short term.