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Welfare Improving Taxation on Savings in a Growth Model

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  • Xin Long

    (African Development Bank Group)

  • Alessandra Pelloni

    (University of Rome "Tor Vergata")

Abstract

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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  • Xin Long & Alessandra Pelloni, 2012. "Welfare Improving Taxation on Savings in a Growth Model," Working Paper series 01_12, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:01_12
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    More about this item

    Keywords

    Capital Income Taxes; R&D; Growth Effect; Welfare Effect;
    All these keywords.

    JEL classification:

    • 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
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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