Implications of tax policy for innovation and aggregate productivity growth

Domenico Ferraro, Soroush Ghazi, Pietro F. Peretto

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the quantitative implications of income taxation for innovation and aggregate productivity growth within the context of a dynamic stochastic general equilibrium model of innovation-led growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income tax with differential treatment of labor income, dividends, and capital gains; (ii) a corporate tax; (iii) a consumption tax; (iv) government purchases. The model is restricted to fit observations for the post-war U.S. economy. Our results suggest that endogenous movements in aggregate productivity and endogenous market structure play a quantitatively important role in the propagation of tax shocks.

Original languageEnglish (US)
Article number103590
JournalEuropean Economic Review
Volume130
DOIs
StatePublished - Nov 2020

Keywords

  • Corporate tax
  • Economic growth
  • Firms’ entry
  • Individual income tax
  • Innovation
  • Total factor productivity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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