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Optimal Capital Taxation in an Economy with Innovation-Driven Growth

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

Abstract

This paper examines whether the Chamley-Judd result of a zero optimal capital tax rate is valid 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 greater. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 11.9 percent. We also find that a positive optimal capital tax rate is more likely to be the case when there is underinvestment in R&D.

Suggested Citation

  • Chen, Ping-ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-Chong, 2019. "Optimal Capital Taxation in an Economy with Innovation-Driven Growth," MPRA Paper 92319, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:92319
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    File URL: https://mpra.ub.uni-muenchen.de/92319/1/MPRA_paper_92319.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal capital taxation; R&D externalities; innovation;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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