Profit Taxation, Innovation and the Financing of Heterogeneous Firms

38 Pages Posted: 18 Jan 2010

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Evelyn Ribi

University of St. Gallen

Date Written: January 2010

Abstract

Credit constraints are more frequent among growth companies with large investment opportunities. For the same reason, profit taxes may harm innovative firms more than standard ones. This paper develops a model of heterogeneous firms where an endogenous share opts for innovation and faces credit constraints in the subsequent expansion phase. We emphasize four results: (i) R&D subsidies not only encourage innovation but also relax finance constraints and help innovative firms to exploit investment opportunities to a larger extent. (ii) Taxes which are neutral in a neoclassical world, still restrict expansion investment of constrained firms by reducing free cash-flow and thereby discourage innovation. (iii) A revenue neutral increase in profit taxes to finance larger R&D subsidies redistributes towards innovative firms and boosts aggregate productivity and welfare. (iv) A revenue neutral tax cut cum base broadening policy similarly boosts innovation and welfare.

Keywords: credit constraints, innovation, investment, profit taxes, R&D subsidies

JEL Classification: G38, H25, L26

Suggested Citation

Keuschnigg, Christian and Ribi, Evelyn, Profit Taxation, Innovation and the Financing of Heterogeneous Firms (January 2010). CEPR Discussion Paper No. DP7626, Available at SSRN: https://ssrn.com/abstract=1536385

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Evelyn Ribi

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
583
PlumX Metrics