Capital Income Tax, R&D Technology, and Economic Growth

Tenryu, Yohei (2017): Capital Income Tax, R&D Technology, and Economic Growth.

Abstract

This paper shows that, in a R&D-based growth model in which vertical and horizontal innovations occur simultaneously, increasing the capital income tax leads to faster the productivity growth and a welfare growth. For this result to hold, the production function for both vertical and horizontal innovations must have constant marginal labor productivity. Furthermore, the paper investigates whether subsidies for both R&D accelerate or deteriorate economic growth and welfare. The government gives more subsidies to the vertical sector with more productivity, leading to economic growth and welfare increases. Conversely, when the government provides subsidies that exceed the threshold ratio in low-productivity sectors, economic growth and welfare are impeded.

• Item Type: MPRA Paper
• Language: English
• Keywords: Endogenous growth, Capital income tax, Vertical innovation, Horizontal Innovation, Scale effect, Subsidy.
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Abel, A. B. (2007), "Optimal Capital Income Taxation," NBER working paper No. 13354, 1-38.

Anagnostopoulos, A., Carceles-Poved, E., and Lin, D. (2012), "Dividend and Capital Gains Taxation under Incomplete Market," Journal of Monetary Economics, 59(7), 599-611.

Annicchiarico, B., Antonarol, V., and Pelloni, A. (2022), "Optimal Factor Taxation in A Scale Free Model of Vertical Innovation," Economic Inquiry, 60(2), 794-830.

Chamley, C. (1986), "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, 54(3), 607-622.

Chen, B. L. and Lu, C. H. (2013), "Optimal Factor Tax Incidence in Two-sector Human Capital-based Models," Journal of Public Economics, 97, 75-94.

Chu, A. C., Cozzi, G., and Galli, S. (2012), "Does Intellectual Monopoly Stimulate or Strife Innovation?" European Economic Review, 56(4), 727-746.

Chu, A, C., Furukawa, Y., and Ji, L. (2016), "Patents, R&D Subsidies, and Endogenous Market Structure in a Schumpeterian Economy, Southern Economic Journal, 82(3), 809-825.

Conesa, J. C., Kitao, S., and Krueger, D. (2009), "Taxing Capital? Not a Bad Idea After All!," American Economic Review, 99(1), 25-48.

De Hek, P. A. (2006), "On Taxation in a Two-sector Endogenous Growth Model with Endogenous Labor Supply," Journal of Economic Dynamics and Control, 30(4), 655-685.

Dinopoulos, E. and Thompson, P. (1998), "Schumpeterian Growth without Scale Effects," Journal of Economic Growth, 3(4), 313-335.

Hiraguchi, R. and Shibata, A. (2015), "Taxing Capital is a Good Idea: The Role of Idiosyncratic Risk in an OLG Model," Journal of Economic Dynamics, and Control, 52, 258-269.

Jones, L. E., Manuelli, R. E., and Rossi, P. E. (1993), "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, 101(3), 485-517.

Judd, K. L. (1985), "Redistributive Taxation in a Simple Perfect Foresight Model," Journal of Public Economics, 28, 59-83.

Lansing, K. J. (1999), "Optimal Redistributive Capital Taxation in a Neoclassical Growth Model," Journal of Public Economics, 73(3), 423-453.

Lucas, R. E. Jr. (1990), "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, 42(2), 293-316.

Niwa, S. (2016), "Patent Claims and Economic Growth," Economic Modelling, 54, 377-381.

Peretto, P. F. (1998), "Technological Change and Population Growth," Journal of Economic Growth, 3(4), 283-311.

Peretto, P, F. (2003), "Fiscal Policy and Long-run Growth in R&D-based Models with Endogenous Market Structure," Journal of Economic Growth, 8(3), 325-347.

Peretto, P. F. (2007), "Corporate Taxes, Growth and Welfare in a Schumpeterian Economy," Journal of Economic Theory, 137(1), 353-382.

Straub, L., and Werning, I. (2020), "Positive Long-Run Capital Taxation: Chamley-Judd Revisited," American Economic Review, 110(1), 86-119.

ten Kate, F. and Milionis, P. (2019), "Is Capital Taxation Always Harmful for Economic Growth?" International Tax and Public Finance, 26, 758-805.

Uhlig, H. and Yanagawa, N. (1996), "Increasing the Capital Income Tax may Lead to Faster Growth," European Economic Review, 40(8), 1521-1540.

Young, A. (1998), "Growth without Scale Effects," Journal of Political Economy, 106(1), 41-63.