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Welfare Improving Taxation on Savings in a Growth Model

35 Pages Posted: 30 Jan 2012  

Xin Long

University of Rome I

Alessandra Pelloni

University of Rome II, Department of Economics

Date Written: January 27, 2012

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.

Keywords: capital income taxes, R&D, growth effect, welfare effect

JEL Classification: E62, H21, O41

Suggested Citation

Long, Xin and Pelloni, Alessandra, Welfare Improving Taxation on Savings in a Growth Model (January 27, 2012). CEIS Working Paper No. 218. Available at SSRN: https://ssrn.com/abstract=1993162 or http://dx.doi.org/10.2139/ssrn.1993162

Xin Long

University of Rome I ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

Alessandra Pelloni (Contact Author)

University of Rome II, Department of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy
390672595908 (Phone)

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