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Implications of Tax Policy for Innovation and Aggregate Productivity Growth

76 Pages Posted: 12 May 2017  

Domenico Ferraro

Arizona State University (ASU) - Economics Department

Soroush Ghazi

Duke University

Pietro F. Peretto

Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Date Written: April 17, 2017

Abstract

The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.

Keywords: Individual income tax; Corporate tax; Economic growth; Total factor productivity (TFP); Firms' entry; Innovation; Research and development (R&D)

JEL Classification: E23; E24; E62; O30; O40

Suggested Citation

Ferraro, Domenico and Ghazi, Soroush and Peretto, Pietro F., Implications of Tax Policy for Innovation and Aggregate Productivity Growth (April 17, 2017). Duke I&E Research Paper No. 2017-11. Available at SSRN: https://ssrn.com/abstract=2966933

Domenico Ferraro (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Soroush Ghazi

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Pietro Peretto

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1807 (Phone)
919-684-8974 (Fax)

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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