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on Public Economics |
| By: | Maarten van 't Riet; Arjan Lejour; Arjan M. Lejour |
| Abstract: | Analysis of the international network of double tax treaties reveals a large potential for tax avoidance. Developing countries are, on average, not more likely to suffer from tax revenue losses than other countries. Yet, this average masks the fact that several countries, such as Bangladesh, Egypt, Indonesia, Kenya, Uganda and Zambia, are vulnerable to substantial potential losses of withholding tax revenue by treaty shopping. The analysis combines tax parameters of more than a hundred countries with an algorithm from network theory, which simulates the tax minimizing behaviour of multinational enterprises. We introduce the notion of potentially aggressive tax treaties. These are the key treaties in treaty shopping routes, that may lead to substantial tax revenue losses in developing countries. Moreover, the treaty partners are often in a prime position to top-up tax undertaxed profits of developing countries that offer tax incentives to attract investment, thus nullifying the incentive effects. |
| Keywords: | tax treaties, treaty shopping, developing countries, network analysis, withholding taxes, aggressive tax treaties, global minimum tax |
| JEL: | F23 H25 H26 O10 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11641 |
| By: | David R. Agrawal; Adib Bagh; Mohammed Mardan |
| Abstract: | The conventional wisdom is that a big jurisdiction sets a higher tax rate than a small jurisdiction. We show this result arises due to simplifying assumptions that imply tax-base sensitivities are equal across jurisdictions. When more than two jurisdictions compete in commodity taxes, tax-base sensitivities need not be equal across jurisdictions and a small jurisdiction can set a higher tax rate than a big jurisdiction. Our analysis extends to capital and profit taxes, and, more generally, to various types of multi-player asymmetric competition. |
| Keywords: | Ramsey rule, inverse elasticity, fiscal competition, optimal taxation, spatial price competition, sales tax |
| JEL: | C70 D40 H20 H70 L10 R50 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11616 |
| By: | Giacomo Corneo |
| Abstract: | An often neglected implication of couple taxation is its impact on marital sorting. A tractable model of such an impact is offered in this paper. It reveals that, as compared to joint taxation with income splitting, individual taxation makes higher-ability individuals more picky in the marriage market, which translates into a higher degree of economic homogamy in society. Furthermore, a shift from joint to individual taxation is predicted to reduce the average quality of marriages in the population. |
| Keywords: | economic homogamy, assortative mating, couple taxation, tax unit, progressive income tax |
| JEL: | H21 H24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11643 |
| By: | Shigeo Morita (Fukuoka University); Yukihiro Nishimura (Osaka University and CESifo); Hirofumi Okoshi (Okayama University) |
| Abstract: | As development of online market brings ongoing concerns that foreign app suppliers avoid value-added tax (VAT) in a domestic country, some countries design a tax reform which makes platform pay VAT instead of app suppliers (platform taxation). In the market where the monopoly platformer determines the prices of the network good and the commission fee of the platform services (with online apps as a representative example), this study investigates whether the prevention of tax leaks by platform tax improves the welfare of the host country, as well as the extent of the cross-market incidence of the two-sided market. We find that the tax reform reduces foreign app suppliers and consumption of a network good such as smartphones, with substantial extent of cross-market pass-through. The effect of the tax reform on home app suppliers crucially depends on the responsiveness of the app supplies from the number of users, which we call entry elasticity. Platform tax also increases the tax burden laid on the network product, but the monopoly seller let the increase of the tax burden born entirely by consumers. We also show that digitalization reduces the loss of welfare as well as tax planning by the platformer. |
| Keywords: | Value-added tax; Tax reform; Digital economy; Platform; Network externality |
| JEL: | F23 H26 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2502 |
| By: | Christine L. Dobridge; Joanne Hsu; Mike Zabek |
| Abstract: | We estimate the effects of personal income tax decreases on financial well-being, including qualitative subjective assessments and quantitative measures. A plausibly causal design shows that tax decreases in the Tax Cuts and Jobs Act made survey respondents more likely to say they were “living comfortably” financially, with null effects at lower levels of subjective financial well-being. Estimates from a similar design using credit bureau data show that people who had larger tax decreases were modestly more likely to open new accounts and more likely to have higher consumer credit balances. Tax decreases had effects on credit scores and delinquencies that are indistinguishable from zero. Results suggest that larger tax decreases improve financial well-being in ways not fully proxied by typical administrative data. |
| Keywords: | taxes, subjective well-being, household finances, credit, financial well-being |
| JEL: | H24 G50 I31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11653 |
| By: | Nu Nu Win (Australian National University); Jonathan Hambur (Reserve Bank of Australia); Robert Breunig (Crawford School of Public Policy, Australian National University) |
| Abstract: | Using Australian tax and survey data, we exploit discrete eligibility cut-offs to estimate the effect of several business investment tax breaks, including tax credits and instant asset write-offs, implemented over the past 15 years. Policies implemented during the global financial crisis increased investment. Responses are larger for unincorporated businesses, possibly reflecting reduced efficacy of investment stimulus under Australia's dividend imputation system. However, we find mostly no evidence of an effect for other investment policies, including those implemented to address the COVID-19 pandemic. |
| Keywords: | investment; tax incentives |
| JEL: | D21 D22 G31 H25 H32 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2025-01 |
| By: | BRUN Lidia (European Commission - JRC); PYCROFT Jonathan; SPEITMANN Raffael (European Commission - JRC); STASIO Andrzej Leszek (European Commission - JRC); STOEHLKER Daniel (European Commission - JRC) |
| Abstract: | Most Member States have already transposed the EU Minimum Corporate Tax Directive that implements the so-called "Pillar Two" of the global agreement to address the tax challenges arising from the digitalisation of the economy. The Directive ensures a 15% global minimum level of taxation of for multinational enterprise groups and large-scale domestic groups in the Union that have an effective tax rate below 15%. The new top-up tax is expected to reduce profit shifting. While previous estimates have been produced by the IMF, OECD and EU Tax observatory, we bring complementary evidence by considering also the long-term and economy-wide impact of Pillar Two for the EU. Our empirical estimates, based on the 2017-2021 country-by-country reporting (CbCR) data collected by the OECD, suggest that Corporate Income Tax (CIT) revenues in the EU would increase on average by 7.1% or EUR 26 billion annually from the implementation of the Global Minimum Tax Rules by all EU countries in the short run. These calculations take into account the recent policy developments in the US concerning the opt-out from the Pillar Two agreement. Our long-term fiscal projections, once the impact of Pillar Two implementation on business investment is factored in, indicate that CIT revenues would increase annually by 7.0% (EUR 25.7 billion) for the EU as a whole. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc141119 |
| By: | Thomas Breda (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Luke Haywood (MCC Berlin - Mercator Research Institute on Global Commons and Climate Change (, DIW Berlin - Deutsche Institut für Wirtschaftsforschung = German Institute for Economic Research); Haomin Wang (Cardiff Business School - Cardiff University) |
| Abstract: | We quantify the unintended effects of a low-wage payroll tax reduction using an equilibrium search model featuring bargaining, worker and firm productivity heterogeneity, labor taxes, and a minimum wage. The decentralized economy is inefficient due to search externalities and labor market policies. We estimate the model using French data and find that a significant reduction in low-wage payroll taxes in 1995 leads to an overall improvement in economic efficiency by increasing employment and correcting existing policy distortions that disincentivize labor force participation. However, the tax reduction, by increasing labor force participation among low-productivity workers and vacancy postings by low-productivity firms, results in negative but minor spillover and reallocation effects due to congestion. We find that the optimal policy mix is a lower minimum wage and lower payroll taxes compared to the policies in place in the early 1990s. |
| Keywords: | Payroll tax, Minimum wage, Equilibrium job search, Worker and firm heterogeneity |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04805291 |
| By: | Axelle Ferriere (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Gaston Navarro (Federal Reserve Board) |
| Abstract: | Historically, large changes in U.S. government spending induced fiscal efforts that were not all alike, with some using more progressive taxes than others. We develop a heterogeneous-agent New Keynesian model to analyse how the distribution of taxes across households shapes spending multipliers. The model yields empirically realistic distributions in marginal propensities to consume and labour elasticities, which result in lower responsiveness to tax changes for higher-income earners. In turn, multipliers are larger when spending is financed with higher tax progressivity—that is, when the tax burden falls more heavily on higher-income earners. This result is historically material. We estimate that, on average, tax rates increased more for top-income than for bottom-income earners after a spending shock. Thus, the typical U.S. spending shock was financed with higher tax progressivity. We further exploit the historical variation in the financing of spending to estimate progressivity-dependent multipliers, which we find consistent with the model. |
| Keywords: | Fiscal stimulus, Government spending, Transfers, Heterogeneous agents |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:hal-04849051 |
| By: | Panagiotis Asimakopoulos |
| Abstract: | We adopted an empirical approach to capture the macroeconomic impact of tax changes for the examined period from 1974 to 2018. It is generally accepted that vector autoregression model (VAR) has proven useful for describing the dynamic interrelationships of multivariate series. Our empirical analysis focus on VAR models and Vector Error Correction Models to capture long term relationships Firstly, we apply a VAR (1, 1) estimation that shows that the tax rate negatively affects GDP growth in the short run. The regression shows that a one percent increase in the tax rate lowers the level of GDP growth by 0, 86%. The effects of a permanent change are given by the cumulative impulse response function which suggest 0, 0025 decline of future GDP growth to one-unit upward shift in total tax rates. In addition, we estimate vector autoregressive model 2, VAR (1, 1), and examine the short run relationship among real GDP growth, personal income taxes, tax on goods and services, property taxes, debt, general government consumption expenditure, gross fixed capital formation and household consumption. The analysis of the coefficients suggests that income taxes were the most important factor in debt servicing, which had a negative impact on growth, and taxes on goods and services (transaction taxes) served mainly to address difficulties in government spending. Increased government spending and household consumption have a negative effect on growth and investment, while property taxes are positively correlated with investment in fixed assets. Government spending is negatively correlated with gross fixed capital formation. Moreover, we estimate vector autoregressive model 3, as VAR (1, 1) and examine the short run relationship among real GDP growth, debt, general government consumption expenditure and tax rates. Our estimation result suggests that debt, government spending and the level of taxation are negatively correlated with GDP growth while lagged GDP growth is positively correlated with GDP growth of current period. In this context, we conclude that policymakers should pursue a strategy that promotes the rationalization of government spending and the sustainability of debt, keeping the revenue capacity at a level that does not harm long-term growth. |
| Keywords: | VAR, VECM, Macroeconomic Impact, Tax Revenues, Greek Tax |
| JEL: | E6 H2 |
| Date: | 2025–03–02 |
| URL: | https://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2025_02 |
| By: | Juin-Jen Chang (Academia Sinica,); Jang-Ting Guo (Department of Economics, University of California Riverside); Wei-Neng Wang (National Taichung University of Science and Technology) |
| Abstract: | This paper examines the theoretical and quantitative interrelations between progressive taxation and after-tax income inequality within a one-sector endogenous growth model. In a simplified two-type version of the macroeconomy, we analytically show that higher fiscal progression leads to less unequal long-run gross/net income distributions, provided the general-equilibrium elasticity of aggregate labor supply surpasses a specific negative threshold. In addition, numerical simulations find that our calibrated economy under useless or useful government spending, together with (i) agents' intertemporal elasticity of consumption substitution taking on the highest empirically-plausible value and (ii) a lower-than-unitary elasticity of capital-labor substitution in production, is able to generate qualitatively as well as quantitatively realistic long-run disposable-income inequality effects of changing the tax progressivity vis-Ã -vis recent panel estimation results. |
| Keywords: | Progressive Taxation; Income Inequality; Endogenous Growth. |
| JEL: | D31 E13 H30 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ucr:wpaper:202503 |
| By: | Stéphane Gauthier (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Fanny Henriet (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We consider optimal anonymous consumption taxes in situations where the magnitude of an externality varies with individuals who cause it. For instance, urban fuel consumers generate greater pollution damages compared to rural consumers, but both groups are subjected to the same fuel tax. We provide a condition for the validity of the targeting principle, where external concerns are only addressed through the tax imposed on the commodity responsible for the externality. When this condition holds, one can separate the equity/efficiency and environmental components of this tax. An illustration suggests that Pigovian considerations explain most of the fuel tax in France. |
| Keywords: | Targeting principle, Local externality, Pollution, Pigovian tax, Consumption taxes, Fuel, Budget de famille |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04331432 |
| By: | Roost, Stefanie (RS: GSBE MGSoG, Maastricht Graduate School of Governance); Gassmann, Franziska (RS: GSBE UM-BIC, RS: GSBE MORSE, Maastricht Graduate School of Governance, RS: GSBE MGSoG) |
| Abstract: | Questions surrounding the allocation and design of social transfers have long intrigued scholars and policymakers in the field of political economy. While transfers targeting those most in need aim to maximize the value of their benefits and improve their livelihood, the political economy of targeting posits that such restrictive eligibility criteria might dampen general social support. This study delves into the social and political sustainability of social protection systems and explores whether and to what extent a broadening of social protection programs impacts society’s redistributive and tax preferences. Using longitudinal individual-level data from Poland’s Panel Survey, we examine the effects of the 2016 transition from income-tested to quasi-universal child benefits on redistributive, tax, and political preferences. Contrary to expectations from political economy models, the findings reveal nuanced responses among beneficiaries and non-beneficiaries. Beneficiaries do not become more supportive of redistribution, and their political and tax preferences remain similar to those of overall non-beneficiaries. A specific group of non-beneficiaries, the ones with children but excluded due to income requirements, react to the policy change by retaliating against the incumbent party and preferring a tax schedule that shifts the burden to other income groups. Overall, the study advances our understanding of the political economy of targeting social transfers and provides insights for policymakers navigating the trade-offs between targeting efficiency and societal endorsement in welfare policy design. |
| JEL: | P29 H23 D72 |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:unm:unumer:2024028 |
| By: | Annette Alstadsaeter (NMBU - Norwegian University of Life Sciences); Sarah Godar (EU Tax - EU Tax Observatory); Panayiotis Nicolaides (EU Tax - EU Tax Observatory); Gabriel Zucman (EU Tax - EU Tax Observatory, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Over the last 10 years, governments have launched major initiatives to reduce international tax evasion. Yet despite the importance of these developments, little is known about the effects of these new policies. Is global tax evasion falling or rising? Are new issues emerging, and if so, what are they? This report addresses these questions thanks to an unprecedented international research collaboration building on the work of more than 100 researchers globally. |
| Date: | 2023–10 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:halshs-04563948 |
| By: | Alberto Porto; Jorge Puig; Bautista Vidal |
| Abstract: | We study the dynamic impact of intergovernmental transfers on subnational budgets. Unlike the abundant literature that focuses on local governments, in this paper we study intermediate governments. Using the ideal case of a multi-level government like Argentina, and methods for dynamic analysis, we disentangled the nature of subnational fiscal adjustments that follow a shock in federal transfers. In the short run, transfers lead to a more than proportional increase in spending, while own-source revenues rise slightly, resulting in a deficit. In the long-run, provinces recover fiscal equilibrium by adjusting spending and taxes to a level consistent with a balanced budget. The steady-state equilibrium involves a higher level of spending, as transfers increase endogenously as a result of cross-regional spillover effects. We also provide a potential mechanisms driving fiscal adjustments and explore relevant extensions that consider regional disparities and different types of taxes, spending, and transfers used to balance subnational budgets. Overall, the paper offers valuable insights for designing subnational fiscal policy. |
| JEL: | D72 H11 H20 H50 H77 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:akh:wcefip:049 |
| By: | Lucas Chancel (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CRIS - Centre de recherche sur les inégalités sociales (Sciences Po, CNRS) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Harvard University, WIL - World Inequality Lab); Philipp Bothe (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, WIL - World Inequality Lab); Tancrède Voituriez (UMR ART-Dev - Acteurs, Ressources et Territoires dans le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - UPVM - Université Paul-Valéry - Montpellier 3 - UPVD - Université de Perpignan Via Domitia - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier, Cirad-ES - Département Environnements et Sociétés - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement, IDDRI - Institut du Développement Durable et des Relations Internationales - Institut d'Études Politiques [IEP] - Paris) |
| Abstract: | The triple climate inequality crisis, or in contributions, impacts and capacity to act within and between countries, is a central issue in addressing climate change. This Comment advocates for progressive wealth taxation as a viable solution to the finance gap. |
| Keywords: | Climate change, Inequality, Taxation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:hal-04385157 |
| By: | Ziesemer, Thomas (RS: GSBE MORSE, Macro, International & Labour Economics, RS: UNU-MERIT) |
| Abstract: | In this paper we evaluate vector-error-correction model (VECM) estimations and simulations of a companion paper to show (i) internal rates of return to public R&D shocks of 17 OECD countries, (ii) the related payback periods, gain/GDP ratios, and discounted (at 4%) net present values, (iii) the underlying effects of public R&D shocks on domestic and foreign private and public R&D stocks. 14 countries show high internal rates of return from positive public R&D shocks if projects are stopped when gains get negative. Three countries show crowding out effects and require (initial) reductions of public R&D before showing positive results through crowding in of private R&D. |
| JEL: | H43 H54 O32 O47 |
| Date: | 2023–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:unm:unumer:2023026 |
| By: | Ryo HORII; Katsunori Minami |
| Abstract: | This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that when individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g > r holds in equilibrium and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g−r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate even though g > r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies. This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that when individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g > r holds in equilibrium and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g−r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate even though g > r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies. This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that when individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g > r holds in equilibrium and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g−r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate even though g > r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:25-003e |