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A Tax Plan for Endogenous Innovation

Author

Listed:
  • Mariano Croce
  • Anastasios G. Karantounias
  • Stephen Raymond
  • Lukas Schmid

Abstract

In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.

Suggested Citation

  • Mariano Croce & Anastasios G. Karantounias & Stephen Raymond & Lukas Schmid, 2017. "A Tax Plan for Endogenous Innovation," FRB Atlanta Working Paper 2017-13, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2017-13
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    References listed on IDEAS

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    Cited by:

    1. Donadelli, Michael & Grüning, Patrick, 2021. "Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    2. Gross, Till & Klein, Paul, 2022. "Optimal tax policy and endogenous growth through innovation," Journal of Public Economics, Elsevier, vol. 209(C).

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    More about this item

    Keywords

    innovation; R&D investment; endogenous growth; government debt; labor tax; subsidy; profit tax;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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