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Welfare Improving Taxation on Savings in a Growth Model

  • Xin Long

    (African Development Bank Group)

  • Alessandra Pelloni

    ()

    (University of Rome "Tor Vergata")

We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labor to capital will increase the employment rate in equilibrium. This has opposite effects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the benefits of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, the optimal tax rate on capital will be sizable.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 01_12.

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Date of creation: Jan 2012
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Handle: RePEc:rim:rimwps:01_12
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