Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200519 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 2017-13
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, Ga.
Abstract: 
In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.
Subjects: 
innovation
R&D investment
endogenous growth
government debt
labor tax
subsidy
profit tax
JEL: 
E32
E62
H21
H63
O3
Document Type: 
Working Paper

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