An Analysis of Fiscal Policy with Endogenous Investment-Specific Technological Change

Gregory Huffman

No 801, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: The effects of distortional fiscal policies are studied within a model in which there is endogenous investment-specific technological change. Labor is used in the production of output and also for research purposes. Labor or capital taxes then distort the trade-off between developing new technologies, and investing in existing types of capital. It is shown that if there is an externality in the research activity, then it may be socially optimal to impose both a capital tax, and an investment tax credit. The growth rate is shown to be increasing in the rate of capital taxation and decreasing in the rate of labor taxation, although the effect of taxation on the growth rate is modest. This supports the observation that there is relatively little relationship between growth rates of economies, and their rates of taxation.

Keywords: Investment-specific technological change; investment tax credit; optimal taxation; capital taxation; endogenous growth; externalities (search for similar items in EconPapers)
JEL-codes: E2 E6 H2 O4 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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