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Tax policy implications for a two‐engine growing economy
Author(s) -
Wang WeiNeng,
Liu ChiaYing,
Chang JuinJen
Publication year - 2021
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/soej.12473
Subject(s) - economics , tax credit , labour economics , endogenous growth theory , value added tax , monetary economics , state income tax , tax reform , income tax , indirect tax , tax deduction , gross income , human capital , public economics , market economy
In an endogenous growth model with two engines of R&D and capital, we investigate the environment of “inclusive growth” for tax reallocations (tax increases or tax credits) to gain broader benefits in terms of promoting the overall GDP growth without an increase in income inequality. Our results show that a tax increase in the capital‐good sector can result in inclusive growth, boosting overall growth and reducing income inequality, provided that the status quo tax rate is not too high. Surprisingly, tax credits are not able to achieve such inclusive growth. While the GDP growth rises, a tax credit in the R&D sector not only increases income inequality but also decreases the aggregate employment, if the labor mobility cost between the final‐good and R&D/capital‐good sectors is relatively low. This provides a caution to policymakers given the fact that research tax credits have served as a common incentive to strengthen the R&D environment.