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Optimal capital taxation in an economy with innovation-driven growth

Author

Listed:
  • Chen, Ping-Ho
  • Chu, Angus C.
  • Chu, Hsun
  • Lai, Ching-Chong

Abstract

This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

Suggested Citation

  • Chen, Ping-Ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-Chong, 2023. "Optimal capital taxation in an economy with innovation-driven growth," Macroeconomic Dynamics, Cambridge University Press, vol. 27(3), pages 635-668, April.
    • Handle: RePEc:cup:macdyn:v:27:y:2023:i:3:p:635-668_3
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    Citations

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    Cited by:

    1. Barbara Annicchiarico & Valentina Antonaroli & Alessandra Pelloni, 2022. "Optimal factor taxation in a scale free model of vertical innovation," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 794-830, April.
    2. Chu, Angus C. & Liao, Chih-Hsing & Peretto, Pietro F., 2025. "Dynamic effects of labor income taxation in an unequal Schumpeterian economy," European Economic Review, Elsevier, vol. 178(C).
    3. Ken Tabata, 2021. "Patent protection and public capital accumulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(1), pages 154-190, February.
    4. Ken Tabata, 2025. "The Effects of Financial Frictions on Optimal Corporate Income and Consumption Taxation in an R&D-Driven Growth Model," Discussion Paper Series 304, School of Economics, Kwansei Gakuin University.
    5. Huan Hu & Mingyu Zhao & Xiaoyi Zhang, 2023. "Network evolution of diffusion in enterprise digitalization and intellectualization transformation: A technology—organization—environment framework perspective," PLOS ONE, Public Library of Science, vol. 18(12), pages 1-23, December.
    6. Wei‐Neng Wang & Chia‐Ying Liu & Juin‐Jen Chang, 2021. "Tax policy implications for a two‐engine growing economy," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 979-1009, January.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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