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Research and Development in Culture: A Case for Cross Subsidies in the Arts

Several types of arguments advocate state involvement in the promotion of culture. Many of them imply some sort of subsidy, usually to non-for-profit firms; none favors taxing cultural events. The tax literature, on the other side, discusses excise taxation on culture only as a way to redistribute income. However, to the extent that culture is a public good, taxing it is undesirable. Why are then excise taxes on public events extant in many countries? This paper argues that the development of profitable artists is analogous to R&D in the industrial organization literature, and that the excise taxation of public cultural events may be part of an efficient policy to fund it. Using a Stackelberg game to model the investment to develop an artist, I find that the optimal tax is a multiple of the expected surplus created by the artist that cannot be appropriated by the investor who funds her, and that progressivity plays a limited role at most.