Taxation, Innovation, and Entrepreneurship
CER-ETH – Center of Economic Research at ETH Zurich Working Paper 14/206
81 Pages Posted: 6 Dec 2014
Date Written: December 4, 2014
We explore optimal and politically feasible growth policies in the form of basic research investments and taxation. Basic research is a public good that benefits innovating entrepreneurs, but its provision and financing also affect the entire economy -- in particular, occupational choices of potential entrepreneurs, wages, dividends, and aggregate output. We show that the impact of basic research on the general economy rationalizes a taxation pecking order to finance basic research. More specifically, in a society with desirably dense entrepreneurial activity, a large share of funds for basic research should be financed by labor taxation, while a minor share should be left to profit taxation. Such tax schemes will induce a significant proportion of agents to become entrepreneurs, thereby rationalizing substantial investments in basic research that fosters their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict and thus strengthening the political support for growth policies.
Keywords: D72, H20, H40, O31, O38.
JEL Classification: Basic research, economic growth, entrepreneurship, income taxation, political economies.
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