Taxation, Innovation, and Entrepreneurship

Hans Gersbach, Ulrich Schetter and Maik Schneider

No 14/206, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We explore optimal and politically feasible growth policies in the form of basic research investments and taxation. Basic research is a public good that benefits innovating entrepreneurs, but its provision and financing also affect the entire economy -- in particular, occupational choices of potential entrepreneurs, wages, dividends, and aggregate output. We show that the impact of basic research on the general economy rationalizes a taxation pecking order to finance basic research. More specifically, in a society with desirably dense entrepreneurial activity, a large share of funds for basic research should be financed by labor taxation, while a minor share should be left to profit taxation. Such tax schemes will induce a significant proportion of agents to become entrepreneurs, thereby rationalizing substantial investments in basic research that fosters their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict and thus strengthening the political support for growth policies.

Keywords: Basic research; economic growth; entrepreneurship; income taxation; political economys (search for similar items in EconPapers)
JEL-codes: D72 H20 H40 O31 O38 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2014-12
New Economics Papers: this item is included in nep-ent, nep-ino, nep-pol and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Taxation, Innovation and Entrepreneurship (2019)
Working Paper: Taxation, Innovation and Entrepreneurship (2013)
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