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R&D subsidies, income taxes, and growth through cycles

Author

Listed:
  • Jing Wan

    (Tianjin University)

  • Jie Zhang

    (Chongqing University
    National University of Singapore)

Abstract

In growth-cycle models, consumption smoothing motivates procyclical household savings and monopolistic competition engenders countercyclical horizontal R&D at fixed costs of capital. However, data in the US and in 15 OECD countries indicate countercyclical household saving, procyclical R&D, and high volatility. This paper explains the observed cyclical properties by realistic income taxes, R&D subsidies, R&D labor, and depreciation. R&D subsidies promote R&D to increase productivity by trading the levels for the varieties of intermediates. R&D-subsidy payments increase consumption and decrease household saving rates by raising taxable income beyond output, thus hindering future R&D and growth. Anticipated R&D-subsidy payments increase household-saving rates by raising returns to saving, thus promoting future R&D and growth. The US taxes yield unstable fluctuations with consecutive periods of R&D, low saving rates, and strong growth as in the technology boom. R&D labor and partial depreciation strengthen the roles of saving and R&D in attaining high volatility.

Suggested Citation

  • Jing Wan & Jie Zhang, 2023. "R&D subsidies, income taxes, and growth through cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 827-866, October.
    • Handle: RePEc:spr:joecth:v:76:y:2023:i:3:d:10.1007_s00199-022-01480-y
    DOI: 10.1007/s00199-022-01480-y
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    More about this item

    Keywords

    Growth; Cycles; Innovation; Saving; Public policy;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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