This paper examines a model in which growth takes place through investment-specific technological change, which in turn is determined endogenously through research spending. In particular, the role of the degree of substitutability between research spending and new capital construction is explored. It is shown that the effect of a change in the capital tax rate on the growth rate can depend on the degree of substitability between research spending and new capital construction. Research subsidies tend to have a larger impact on the growth rate than would an investment tax credit of the same magnitude. Increases in the capital tax rate can increase the growth rate of the economy, even in the absence of externalities. In contrast to the existing literature, the welfare cost of capital taxation in this model can be negligible. There may be multiple tax rates on capital that achieve the same growth rate. It is demonstrated that in the presence of certain types of positive externalities, the optimal growth rate can be attained through the use of capital taxes -- rather than subsidies. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.
Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment H2 - Public Economics - - Taxation, Subsidies, and Revenue O3 - Economic Development, Technological Change, and Growth - - Technological Change O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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