Optimal Factor Taxation in A Scale Free Model of Vertical Innovation

Annicchiarico BarbaraAntonaroli ValentinaPelloni Alessandra
CEIS Research Paper
The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale-less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where R&D productivity is decreasing in the size of the economy. This decreasing productivity removes scale effects, which are a controversial prediction of first-generation endogenous growth models. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital, for reasonable parametrizations of the model. This is true even if the long-run growth rate decreases, with respect to the initial situation in which capital income is not taxed.
 

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Number: 485
Keywords: Endogenous growth, Scale effects, Capital Income Taxation, Welfare effect.
JEL codes: O41, E62, H21
Volume: 18
Issue: 3
Date: Wednesday 13 May 2020
Revision Date: Wednesday 13 May 2020