Net of subsidies as a driver to tackle the negative impact of capital income tax on economic growth: A dynamic CGE application to CEMAC countries

Abstract

Abstract While theoretical studies proclaim positive effects of capital income tax on economic growth, empirical work exhibit mixed conclusions. However, there is a gap in the existing body of literature for studies addressing the mechanism is this dichotomy. This study contributes to fill this gap, by investigating the role that can play the net of subsidies in explaining the capital income tax effects on economic growth, focusing on the Central African Economic and Monetary Community (CEMAC) countries. It employs a dynamic Computable General Equilibrium (CGE) model to access these impacts using the 2015 Social Accounting Matrices (SAM). Simulations are carried out on the period 2023–2030 and findings reveal that, while most of the CEMAC countries exhibit a positive impact of indirect tax on commodities, only Chad and Gabon experience positive impacts for capital income tax. These countries figured out to exhibit negative net of subsidies which created a public deficit, challenged by capital income tax increase. The findings emphasize the potential for targeted investments in key sectors to harness net–of–subsidies’ positive impact on economic growth. Jel classification: C68, O40, H25