Taxation and Innovation - A Sectorial Approach

49 Pages Posted: 11 Mar 2016 Last revised: 27 Oct 2018

See all articles by David Hasen

David Hasen

University of Florida Levin College of Law

Date Written: March 11, 2016

Abstract

A number of tax rules have been adopted or proposed to promote innovation. The primary justification for these rules is that they can be effective in reducing or eliminating chronic market failure in the innovation sector. This paper argues that special tax rules for innovation generally are inappropriate. The basic circumstance giving rise to market failure in the innovation sector is the positive externality associated with information production. Special tax rules do not correct the externality; they merely compensate for it through other mechanisms that themselves create deadweight loss. In place of special tax rules that promote innovation, policy makers should adopt rules that counteract disproportionately large tax-induced distortions in the innovation sector. Among these distortions is excess risk-taking, a phenomenon attributable to the lognormal nature of returns to risk-bearing.

Keywords: income taxation, law and economics, intellectual property

JEL Classification: H21, K34, 034

Suggested Citation

Hasen, David, Taxation and Innovation - A Sectorial Approach (March 11, 2016). University of Illinois Law Review, Forthcoming, University of Florida Levin College of Law Research Paper No. 18-11, Available at SSRN: https://ssrn.com/abstract=2746681 or http://dx.doi.org/10.2139/ssrn.2746681

David Hasen (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

HOME PAGE: http://https://www.law.ufl.edu/faculty/david-hasen

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