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Optimal Taxation and R&D Policies

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  • Stefanie Stantcheva

    (Harvard University)

Abstract

We study the optimal design of firm taxation and R&D subsidies in a dynamic model in which the returns to R&D investment by firms are heterogeneous across firms and uncertain over time. A firm's quality and risky returns are private information. We use a mechanism design approach to solve for the optimal taxation of firms and R&D policies over the firms' life cycle. We highlight the crucial parameters and elasticities that determine the sign and magnitude of the optimal policies. We calibrate the model to U.S. firm data to quantitatively illustrate the evolution of the optimal taxes and subsidies over firms' life cycles. Finally, we evaluate the performance of simpler tax and subsidy instruments, namely linear taxes and R&D subsidies, size-dependent, or firm age-dependent policies.

Suggested Citation

  • Stefanie Stantcheva, 2015. "Optimal Taxation and R&D Policies," 2015 Meeting Papers 1533, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1533
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    4. Ufuk Akcigit & Douglas Hanley & Nicolas Serrano-Velarde, 2021. "Back to Basics: Basic Research Spillovers, Innovation Policy, and Growth," Review of Economic Studies, Oxford University Press, vol. 88(1), pages 1-43.
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    Cited by:

    1. Ufuk Akcigit & Douglas Hanley & Nicolas Serrano-Velarde, 2021. "Back to Basics: Basic Research Spillovers, Innovation Policy, and Growth," Review of Economic Studies, Oxford University Press, vol. 88(1), pages 1-43.
    2. Stefanie Stantcheva, 2020. "Dynamic Taxation," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 801-831, August.
    3. Steve Raymond & Lukas Schmid & Anastasios Karantounias & Mariano Croce, 2017. "A Tax Plan for Endogenous Innovation," 2017 Meeting Papers 109, Society for Economic Dynamics.
    4. Schankerman, Mark & Schuett, Florian, 2020. "Patent Screening, Innovation, and Welfare," Discussion Paper 2020-024, Tilburg University, Center for Economic Research.
    5. Alex Bell & Raj Chetty & Xavier Jaravel & Neviana Petkova & John Van Reenen, 2019. "Who Becomes an Inventor in America? The Importance of Exposure to Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 134(2), pages 647-713.
    6. Schankerman, Mark & Schuett, Florian, 2020. "Patent Screening, Innovation, and Welfare," Other publications TiSEM 71ffc853-44e7-4117-ac82-4, Tilburg University, School of Economics and Management.
    7. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2018. "Growth through acquisition of innovations," Working Papers w0247, New Economic School (NES).
    8. Ilhan Guner, . "Growth and Welfare Implications of Sector-Specific Innovations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    9. Ufuk Akcigit, 2017. "Innovation and Trade Policy in a Globalizing World," 2017 Meeting Papers 1627, Society for Economic Dynamics.
    10. Bronwyn H. Hall, 2020. "Tax Policy for Innovation," NBER Chapters, in: Innovation and Public Policy, pages 151-188, National Bureau of Economic Research, Inc.
    11. Ufuk Akcigit & Stefanie Stantcheva, 2020. "Taxation and Innovation: What Do We Know?," NBER Chapters, in: Innovation and Public Policy, pages 189-212, National Bureau of Economic Research, Inc.
    12. Saul Lach & Zvika Neeman & Mark Schankerman, 2021. "Government Financing of R&D: A Mechanism Design Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 13(3), pages 238-272, August.
    13. Gordon, Roger & Sarada,, 2018. "How should taxes be designed to encourage entrepreneurship?," Journal of Public Economics, Elsevier, vol. 166(C), pages 1-11.
    14. Charles Delmotte, 2021. "Simple rules and the Political Economy of Income Taxation: the strengths of a uniform expense rule," European Journal of Law and Economics, Springer, vol. 52(2), pages 323-339, December.
    15. Ugur, Mehmet & Trushin, Eshref, 2018. "Asymmetric information and heterogeneous effects of R&D subsidies: evidence on R&D investment and employment of R&D personel," Greenwich Papers in Political Economy 21943, University of Greenwich, Greenwich Political Economy Research Centre.
    16. Peter Spencer & Peter Smith & Paulo Santos Monteiro, 2020. "How to better align the U.K.’s corporate tax structure with national objectives," Discussion Papers 20/02, Department of Economics, University of York.
    17. Lassi Ahlvik & Inge van den Bijgaart, 2022. "Screening Green Innovation through Carbon Pricing," CESifo Working Paper Series 9931, CESifo.
    18. Gordon, Roger H & Sarada,, 2017. "How Should Taxes Be Designed to Encourage Entrepreneurship?," University of California at San Diego, Economics Working Paper Series qt86z3h4n4, Department of Economics, UC San Diego.
    19. Ufuk Akcigit & John Grigsby & Tom Nicholas & Stefanie Stantcheva, 2018. "Taxation and Innovation in the 20th Century," NBER Working Papers 24982, National Bureau of Economic Research, Inc.
    20. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2019. "Growth through acquisition of innovations," Working Papers w0247, Center for Economic and Financial Research (CEFIR).

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    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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