A Tax Plan for Endogenous Innovation

Steve Raymond, Lukas Schmid, Anastasios Karantounias and Mariano Croce
Additional contact information
Steve Raymond: UNC
Lukas Schmid: Duke University
Mariano Croce: University of North Carolina at Chapel H

No 109, 2017 Meeting Papers from Society for Economic Dynamics

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 positive spillovers of 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.

Date: 2017
New Economics Papers: this item is included in nep-dge, nep-ino, nep-pbe and nep-tid
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Citations: View citations in EconPapers (2)

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Working Paper: A Tax Plan for Endogenous Innovation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:109

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