The Dynamic Effects of Income Tax Changes in a World of Ideas

James Cloyne, Joseba Martinez, Haroon Mumtaz and Paolo Surico

No 17455, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Using a narrative identification of US tax changes over the post-WWII period, we show that corporate income tax cuts foster R&D spending and innovation, leading to a persistent increase in aggregate productivity and output. In contrast, changes in the average personal income tax rate have mostly short-term effects. An estimated endogenous productivity model highlights the role of “applied research†- over and above formal R&D - as a main force behind these results, and suggests a social rate of return to investment in innovation between 20% and 75%.

Keywords: TFP (search for similar items in EconPapers)
JEL-codes: E23 E62 H24 H25 H31 H32 O32 (search for similar items in EconPapers)
Date: 2022-07
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Working Paper: The Dynamic Effects of Income Tax Changes in a World of Ideas (2023)
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