Welfare Improving Taxation on Savings in a Growth Model

Long XinPelloni Alessandra
CEIS Research Paper
We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labor to capital will increase the employment rate in equilibrium. This has opposite e¤ects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the benefits of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, the optimal tax rate on capital will be sizable.
Number: 218
Keywords: Capital Income Taxes, R&D, Growth Effect, Welfare Effect
JEL codes: E62, H21, O41
Date: Friday 27 January 2012
Revision Date: Friday 27 January 2012