Abstract
This paper examines the effects of taxation on the long run distance to frontier of the economy as well as the welfare and growth rate. The technological progress of an economy is assumed to be obtained from both innovation and imitation. In this paper, both innovation and imitation improve technology level of the economy. Innovation targets on local technology frontier, while imitation targets on global technology fron- tier. We show that higher capital income tax results in longer steady state distance to frontier while it increases steady state welfare. By analyzing the transitional dynamics, we find that higher capital income tax will lead to lower current growth rate. The effect of capital income tax on total welfare is inverse-U shaped.
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