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Growth Effects of Capital Income Taxes: How Much Does Endogenous Innovation Matter?

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  • Hwan C . Lin
  • Benjamin Russo

Abstract

The paper compares the way economies with exogenous and endogenous innovation respond to capital income taxes. If innovation is exogenous, tax cuts increase saving. If innovation is endogenous, tax cuts increase innovation as well. Faster innovation raises capital productivity and calls forth still more saving. A larger capital stock lowers the discount rate, increases the present value of monopoly profit and calls for faster innovation. How large a difference endogenous innovation might make is an open question. We calculate numerical solutions of a model including features of the U.S. tax code that affect incentives to innovate. The results suggest that models with exogenous innovation substantially underestimate long-run effects of capital income taxes. Copyright Blackwell Publishing, Inc. 2002.

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 4 (2002)
Issue (Month): 4 (October)
Pages: 613-640

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Handle: RePEc:bla:jpbect:v:4:y:2002:i:4:p:613-640

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Cited by:
  1. Brita Bye & Taran Fæhn & Tom-Reiel Heggedal, 2007. "Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis," Discussion Papers, Research Department of Statistics Norway 510, Research Department of Statistics Norway.
  2. Russo, Benjamin & Gandar, John M., 2003. "Interest-sensitive wealth and the life-cycle hypothesis: implications for fiscal policy," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 43(3), pages 418-432.
  3. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite, Department of Communication, University of Teramo 0091, Department of Communication, University of Teramo.
  4. Bye, Brita & Fæhn, Taran & Heggedal, Tom-Reiel, 2009. "Welfare and growth impacts of innovation policies in a small, open economy; an applied general equilibrium analysis," Economic Modelling, Elsevier, Elsevier, vol. 26(5), pages 1075-1088, September.
  5. Tom-Reiel Heggedal & Karl Jacobsen, 2008. "Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis," Discussion Papers, Research Department of Statistics Norway 536, Research Department of Statistics Norway.
  6. Brita Bye & Taran Fæhn & Leo A. Grünfeld, 2008. "Growth policy in a small, open economy. Domestic innovation and learning from abroad," Discussion Papers, Research Department of Statistics Norway 572, Research Department of Statistics Norway.
  7. Heggedal, Tom-Reiel & Jacobsen, Karl, 2011. "Timing of innovation policies when carbon emissions are restricted: An applied general equilibrium analysis," Resource and Energy Economics, Elsevier, Elsevier, vol. 33(4), pages 913-937.

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