Taxation, Innovation, and Entrepreneurship

Hans Gersbach, Ulrich Schetter, Maik Schneider

OAI: oai:purehost.bath.ac.uk:publications/15fc5a07-1b9a-4e2e-b225-9650c748fdd4 • DOI: https://doi.org/10.1111/ecoj.12588

We explore optimal and politically feasible growth policies consisting of basic research investments and taxation. We show that the impact of basic research on the general economy rationalises a taxation pecking order with high labour taxes and low profit taxes. This scheme induces a significant proportion of agents to become entrepreneurs, thereby rationalising substantial investments in basic research fostering their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict, and thus strengthening political support for growth policies.