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Optimal capital taxation in an economy with innovation-driven growth

Published online by Cambridge University Press:  19 October 2021

Ping-Ho Chen ,
Angus C. Chu ,
Hsun Chu  and
Ching-Chong Lai
Ping-Ho Chen
Affiliation:
Department of Economics, Tunghai University, Taichung, Taiwan
Angus C. Chu
Affiliation:
Department of Economics, University of Macau, Macau, China
Hsun Chu*
Affiliation:
Department of Economics, Tunghai University, Taichung, Taiwan
Ching-Chong Lai
Affiliation:
Institute of Economics, Academia Sinica, Taipei, Taiwan Department of Economics, National Cheng Chi University, Taipei, Taiwan Institute of Economics, National Sun Yat-Sen University, Kaohsiung, Taiwan Department of Economics, Feng Chia University, Taichung, Taiwan
*
*Corresponding author: Hsun Chu. Email: [email protected]
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Abstract

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This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

Keywords

Optimal capital taxationR&D externalitiesinnovationE62H21O31
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 3 , April 2023 , pp. 635 - 668
Copyright
© Cambridge University Press 2021

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