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A Tax Plan for Endogenous Innovation

Mariano Croce (), Anastasios Karantounias (), Stephen Raymond () and Lukas Schmid ()
Additional contact information
Stephen Raymond: University of North Carolina at Chapel Hill, Postal: Economics Department, Gardner Hall CB 3305, , Chapel Hill, NC 27599, http://econ.unc.edu/people/administration/graduate-students/
Lukas Schmid: Duke University, Postal: The Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, https://faculty.fuqua.duke.edu/~ls111/

No 2017-13, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.

Keywords: innovation; R&D investment; endogenous growth; government debt; labor tax; subsidy; profit tax (search for similar items in EconPapers)
JEL-codes: E32 E62 H21 H63 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ino, nep-mac, nep-pbe, nep-pub and nep-tid
Date: 2017-11-01, Revised 2017-11-02
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