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Optimal Factor Taxation in A Scale Free Model of Vertical Innovation

Author

Listed:
  • Barbara Annicchiarico

    (Department of Economics and Finance, University of Rome “Tor Vergata”, Italy)

  • Valentina Antonaroli

    (Department of Economics and Finance, University of Rome “Tor Vergata”, Italy)

  • Alessandra Pelloni

    (Department of Economics and Finance, University of Rome “Tor Vergata”, Italy; Rimini Centre for Economic Analysis)

Abstract

The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale-less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where R&D productivity is decreasing in the size of the economy. This decreasing productivity removes scale effects, which are a controversial prediction of first-generation endogenous growth models. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital, for reasonable parametrizations of the model. This is true even if the long-run growth rate decreases, with respect to the initial situation in which capital income is not taxed.

Suggested Citation

  • Barbara Annicchiarico & Valentina Antonaroli & Alessandra Pelloni, 2020. "Optimal Factor Taxation in A Scale Free Model of Vertical Innovation," Working Paper series 20-20, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:20-20
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    More about this item

    Keywords

    Endogenous growth; Scale effects; Capital Income Taxation; Welfare effect;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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