Corporate taxes, growth and welfare in a Schumpeterian economy
Abstract
I take a new look at the long-run implications of taxation through the lens of modern
Schumpeterian growth theory. I focus on the latest vintage of models that sterilize
the scale effect through a process of product proliferation that fragments the aggregate
market into submarkets whose size does not increase with the size of the workforce.
I show that the following interventions raise welfare: (a) granting full expensibility
of R&D to incorporated firms; (b) eliminating the corporate income tax and/or the
capital gains tax; (c) reducing taxes on labor and/or consumption. What makes these
results remarkable is that in all three cases the endogenous increase in the tax on
dividends necessary to balance the budget has a positive effect on growth. A general
implication of my analysis is that corporate taxation plays a special role in Schumpeterian
economies and provides novel insights on how to design welfare-enhancing tax reforms.
© 2007 Elsevier Inc. All rights reserved.
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https://hdl.handle.net/10161/1939Published Version (Please cite this version)
10.1016/j.jet.2006.11.005Publication Info
Peretto, PF (2007). Corporate taxes, growth and welfare in a Schumpeterian economy. Journal of Economic Theory, 137(1). pp. 353-382. 10.1016/j.jet.2006.11.005. Retrieved from https://hdl.handle.net/10161/1939.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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Pietro F. Peretto
Professor of Economics
Peretto is a macroeconomist who studies the sources and effects of technological change
mainly using endogenous growth theory. With this focus, he has studied international
trade, growth and innovation, market structure, corporate taxation, industrial organization,
development and the environment, R&D, demography, and more. He has been publishing
his research for nearly three decades and has had his work appear in books and leading
academic journals. He is Associate Editor of the Journal of

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