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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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  • Hwan C . Lin & Benjamin Russo, 2002. "Growth Effects of Capital Income Taxes: How Much Does Endogenous Innovation Matter?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 613-640, October.
  • Handle: RePEc:bla:jpbect:v:4:y:2002:i:4:p:613-640
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    Cited by:

    1. repec:eee:pubeco:v:154:y:2017:i:c:p:137-159 is not listed on IDEAS
    2. 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 510, Statistics Norway, Research Department.
    3. Bye Brita & Faehn Taran & Grünfeld Leo A., 2011. "Growth and Innovation Policy in a Small, Open Economy: Should You Stimulate Domestic R&D or Exports?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-41, July.
    4. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    5. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.
    6. Brita Bye & Taran Fæhn & Leo A. Grünfeld, 2008. "Growth policy in a small, open economy. Domestic innovation and learning from abroad," Discussion Papers 572, Statistics Norway, Research Department.
    7. 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, vol. 26(5), pages 1075-1088, September.
    8. 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, vol. 33(4), pages 913-937.
    9. Tom-Reiel Heggedal & Karl Jacobsen, 2008. "Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis," Discussion Papers 536, Statistics Norway, Research Department.
    10. 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, vol. 43(3), pages 418-432.

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