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An Analysis of Fiscal Policy with Endogenous Investment-Specific Technological Change

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  • Gregory W. Huffman

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    (Department of Economics, Vanderbilt University)

Abstract

The effects of distortional fiscal policies are studied within a model in which there is endogenous investment-specific technological change. Labor is used in the production of output and also for research purposes. Labor or capital taxes then distort the trade-off between developing new technologies, and investing in existing types of capital. It is shown that if there is an externality in the research activity, then it may be socially optimal to impose both a capital tax, and an investment tax credit. The growth rate is shown to be increasing in the rate of capital taxation and decreasing in the rate of labor taxation, although the effect of taxation on the growth rate is modest. This supports the observation that there is relatively little relationship between growth rates of economies, and their rates of taxation.

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File URL: http://www.accessecon.com/pubs/VUECON/vu08-w01.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0801.

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Date of creation: Jan 2008
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Handle: RePEc:van:wpaper:0801

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Investment-specific technological change; investment tax credit; optimal taxation; capital taxation; endogenous growth; externalities;

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References

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  1. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1995. "Long-Run Implications of Investment-Specific Technological Change," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9510, University of Western Ontario, Department of Economics.
  2. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  3. Michael Gort & Jeremy Greenwood & Peter Rupert, 1998. "Measuring the rate of technological progress in structures," Working Paper 9806, Federal Reserve Bank of Cleveland.
  4. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
  5. Greg Huffman, 2007. "Endogenous Growth Through Investment-Specific Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 615-645, October.
  6. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  7. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  8. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  9. Christopher House & Matthew D. Shapiro, 2006. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," NBER Working Papers 12514, National Bureau of Economic Research, Inc.
  10. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  11. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, January.
  12. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  13. Huffman, Gregory W., 2004. "Propagation through endogenous investment-specific technological change," Economics Letters, Elsevier, vol. 84(2), pages 191-197, August.
  14. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, March.
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Cited by:
  1. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2011. "Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change," MPRA Paper 34111, University Library of Munich, Germany.

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