Effect of the Tax System ON R&D Intensity, Growth, Wages and Consumption Share†

Research paper by Óscar Afonso, Ana Maria Bandeira, Manuela Magalhães

Indexed on: 25 Oct '17Published on: 13 Oct '17Published in: Australian Economic Papers


We propose a general equilibrium knowledge-driven (semi-)endogenous-growth model with horizontal R&D, which is extended to consider two types of labour, skilled and unskilled, and exogenous government expenditure, financed through taxes on financial assets and on labour income, to analyse the implications of the tax system on R&D intensity, economic growth, wage inequality and consumption share in the output. In particular, we show that: (i) taxes have negative influence in the consumption share, being higher the marginal effect of the labour-income tax; (ii) for any given government expenditure share, an increase (a decrease) in financial-assets tax decreases (increases) the labour-income tax; (iii) only the financial-assets tax affects negatively the R&D intensity and the skill-premium; thus, to reduce the skill-premium the financial-assets tax must increase; (iv) ignoring the effect on wage inequality and on R&D intensity, taxes are substitutes.