Factor Income Taxation in a Horizontal Innovation Model

36 Pages Posted: 22 Apr 2013 Last revised: 26 Apr 2013

Xin Long

African Development Bank

Alessandra Pelloni

University of Rome II, Department of Economics

Date Written: April 19, 2013

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 in most cases 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 benefiĀ…ts of inventions. Their relative momentum determines the sign of the welfare effect of the redistribution. 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, Factor Income Taxation in a Horizontal Innovation Model (April 19, 2013). CEIS Working Paper No. 273. Available at SSRN: https://ssrn.com/abstract=2254051 or http://dx.doi.org/10.2139/ssrn.2254051

Xin Long

African Development Bank ( email )

Rue Joseph Anoma
Abidjan, Ivory Coast 01 BP 1387
Ivory Coast (Cote D'ivoire)

Alessandra Pelloni (Contact Author)

University of Rome II, Department of Economics ( email )

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

Paper statistics

Downloads
32
Abstract Views
279