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Implications of tax policy for innovation and aggregate productivity growth

Domenico Ferraro, Soroush Ghazi and Pietro Peretto ()

European Economic Review, 2020, vol. 130, issue C

Abstract: We examine the quantitative implications of income taxation for innovation and aggregate productivity growth within the context of a dynamic stochastic general equilibrium model of innovation-led growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income tax with differential treatment of labor income, dividends, and capital gains; (ii) a corporate tax; (iii) a consumption tax; (iv) government purchases. The model is restricted to fit observations for the post-war U.S. economy. Our results suggest that endogenous movements in aggregate productivity and endogenous market structure play a quantitatively important role in the propagation of tax shocks.

Keywords: Individual income tax; Corporate tax; Economic growth; Total factor productivity; Firms’ entry; Innovation (search for similar items in EconPapers)
JEL-codes: E23 E24 E62 O30 O40 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.euroecorev.2020.103590

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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