Effects of Patent Protection on Optimal Corporate Income and Consumption Taxes in an R&D‐Based Growth Model

Abstract

Does reducing the corporate income tax accompanied by an increase in the consumption tax to meet the government's budget constraint improve welfare? To respond, we examine the welfare‐maximizing corporate income tax and consumption tax rates in an R&D‐based growth model under the constraint that the government's budget is balanced at each point of time. Further, we consider how welfare‐maximizing tax rates change as patent protection becomes stronger, as seen in many countries. The results show that as patent protection becomes stronger, the corporate income tax rate should be higher and the consumption tax rate should be lower. This implies that under stronger patent protection, recovering production at the expense of innovation by raising corporate income tax and reducing consumption tax improves welfare.