Welfare Improving Taxation on Savings in a Growth Model

Xin Long and Alessandra Pelloni
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Xin Long: African Development Bank Group

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labor to capital will increase the employment rate in equilibrium. This has opposite effects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the benefits of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, the optimal tax rate on capital will be sizable.

Keywords: Capital Income Taxes; R&D; Growth Effect; Welfare Effect (search for similar items in EconPapers)
JEL-codes: E62 H21 O41 (search for similar items in EconPapers)
Date: 2012-01
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Working Paper: Welfare Improving Taxation on Savings in a Growth Model (2012)
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