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Taxation, Innovation and Entrepreneurship

  • Schetter, Ulrich
  • Gersbach, Hans
  • Schneider, Maik

We examine how basic research should be financed. While basic research is a public good benefiting innovating entrepreneurs it also affects the entire economy: occupational choices of potential entrepreneurs, wages of workers, dividends to shareholders, and aggregate output. We show that the general economy impact of basic research rationalizes a pecking order of taxation to finance basic research. In particular, in a society with desirable dense entrepreneurial activity, a large share of funds for basic research should be financed by labor taxation and a minor share is left to profit taxation. Such tax schemes induce a significant share of agents to become entrepreneurs, thereby rationalizing substantial investments in basic research. These entrepreneurial economies, however, may make a majority of citizens worse off if those individuals do not possess shares of final good producers in the economy. In such circumstances, stagnation may prevail.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79776.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79776
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