Taxation, Innovation, and Entrepreneurship

CER-ETH – Center of Economic Research at ETH Zurich Working Paper 14/206

81 Pages Posted: 6 Dec 2014

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Maik T. Schneider

University of Bath

Ulrich Schetter

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research; Harvard University - Center for International Development (CID)

Date Written: December 4, 2014

Abstract

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.

Suggested Citation

Gersbach, Hans and Schneider, Maik T. and Schetter, Ulrich, Taxation, Innovation, and Entrepreneurship (December 4, 2014). CER-ETH – Center of Economic Research at ETH Zurich Working Paper 14/206. Available at SSRN: https://ssrn.com/abstract=2534047 or http://dx.doi.org/10.2139/ssrn.2534047

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Maik T. Schneider

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Ulrich Schetter (Contact Author)

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research ( email )

Dufourstr. 48
St. Gallen, 9000
Switzerland

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

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