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Welfare improving taxation on saving in a growth model

By Long Xin and Pelloni Alessandra

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 labour 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 bene?ts of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, taxing capital more heavily than labour can be welfare increasing.Capital income taxes, R&D, growth effect, welfare Effect

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