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Optimal tax policy and endogenous growth through innovation

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  • Gross, Till
  • Klein, Paul

Abstract

We investigate optimal tax policy in a Romer-style endogenous growth model. We derive formulas for the optimal tax rates on capital, labour, and innovation on a balanced growth path. We compute the balanced growth path and the transition to it with optimal policy for a range of parameter values. We find that capital should be taxed in the short run, but be paid its marginal product in the long run. The returns to innovation and production labour, on the other hand, should always be lower than their marginal products. Whether the resulting taxes on innovative activity should be positive or negative depends on (a) the extent of government spending needs, (b) the importance of innovation externalities and (c) the market power of patent holders. The welfare gains from optimal policy are much larger than in a comparable exogenous growth model.

Suggested Citation

  • Gross, Till & Klein, Paul, 2022. "Optimal tax policy and endogenous growth through innovation," Journal of Public Economics, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:pubeco:v:209:y:2022:i:c:s0047272722000470
    DOI: 10.1016/j.jpubeco.2022.104645
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    More about this item

    Keywords

    Dynamic optimal taxation; Ramsey taxation; Innovation; Endogenous growth; Technological change;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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