Taxation and Innovation - A Sectorial Approach
49 Pages Posted: 11 Mar 2016 Last revised: 27 Oct 2018
Date Written: March 11, 2016
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: Suggested Citation