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An Analysis of Fiscal Policy with Endogenous Investment-Specific Technological Change

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Listed author(s):
  • Gregory W. Huffman

    ()

    (Department of Economics, Vanderbilt University)

Abstract

The effects of distortional fiscal policies are studied within a model in which there is endogenous investment-specific technological change. Labor is used in the production of output and also for research purposes. Labor or capital taxes then distort the trade-off between developing new technologies, and investing in existing types of capital. It is shown that if there is an externality in the research activity, then it may be socially optimal to impose both a capital tax, and an investment tax credit. The growth rate is shown to be increasing in the rate of capital taxation and decreasing in the rate of labor taxation, although the effect of taxation on the growth rate is modest. This supports the observation that there is relatively little relationship between growth rates of economies, and their rates of taxation.

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File URL: http://www.accessecon.com/pubs/VUECON/vu08-w01.pdf
File Function: First version, 2008
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0801.

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Date of creation: Jan 2008
Handle: RePEc:van:wpaper:0801
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Keywords: Investment-specific technological change; investment tax credit; optimal taxation; capital taxation; endogenous growth; externalities;

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Find related papers by JEL classification:
  • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
  • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H2 - Public Economics - - Taxation, Subsidies, and Revenue
  • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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  1. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-550, June.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
  3. Greg Huffman, 2007. "Endogenous Growth Through Investment-Specific Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 615-645, October.
  4. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  6. repec:ucp:bknber:9780226304557 is not listed on IDEAS
  7. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-362, June.
  8. Michael Gort & Jeremy Greenwood & Peter Rupert, 1999. "Measuring the Rate of Technological Progress in Structures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 207-230, January.
  9. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
  10. Huffman, Gregory W., 2004. "Propagation through endogenous investment-specific technological change," Economics Letters, Elsevier, vol. 84(2), pages 191-197, August.
  11. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
  12. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  13. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, July.
  14. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  15. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-768, June.
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Cited by:

  1. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2011. "Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change," MPRA Paper 34111, University Library of Munich, Germany.
  2. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2016. "Factor income taxation, growth, and investment specific technological change," Economic Modelling, Elsevier, vol. 57(C), pages 133-152.

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