A Tax Plan for Endogenous Innovation

45 Pages Posted: 23 Aug 2018 Last revised: 14 Apr 2020

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Stephen Raymond

University of North Carolina (UNC) at Chapel Hill

Lukas Schmid

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-11-01

Abstract

In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.

Keywords: innovation, R&D investment, endogenous growth, government debt, labor tax, subsidy, profit tax

JEL Classification: E32, E62, H21, H63, O3

Suggested Citation

Croce, Mariano Massimiliano and Karantounias, Anastasios G. and Raymond, Stephen and Schmid, Lukas, A Tax Plan for Endogenous Innovation (2017-11-01). FRB Atlanta Working Paper No. 2017-13, Available at SSRN: https://ssrn.com/abstract=3092154

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Stephen Raymond

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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