R&D subsidies, income taxes, and growth through cycles

In growth-cycle models, consumption smoothing motivates procyclical household savings and monopolistic competition engenders countercyclical horizontal R & D at fixed costs of capital. However, data in the US and in 15 OECD countries indicate countercyclical household saving, procyclical R & D, and high volatility. This paper explains the observed cyclical properties by realistic income taxes, R & D subsidies, R & D labor, and depreciation. R & D subsidies promote R & D to increase productivity by trading the levels for the varieties of intermediates. R & D-subsidy payments increase consumption and decrease household saving rates by raising taxable income beyond output, thus hindering future R & D and growth. Anticipated R & D-subsidy payments increase household-saving rates by raising returns to saving, thus promoting future R & D and growth. The US taxes yield unstable fluctuations with consecutive periods of R & D, low saving rates, and strong growth as in the technology boom. R & D labor and partial depreciation strengthen the roles of saving and R & D in attaining high volatility.