Factor Income Taxation in a Horizontal Innovation 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 in most cases increase the employment rate in equilibrium. This has opposite effects 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 of the redistribution. We show that, for parameter values consistent with available estimates, the optimal tax rate on capital will be sizable.
Keywords: Capital Income Taxes, R&D, Growth Effect, Welfare Effect.
JEL codes: E62,H21,O41
Date: Friday, April 19, 2013
Revision Date: Friday, April 19, 2013