2.Consider the R&D-driven economy in Jaimovich and Rebelo ("Nonlinear Effects of Taxtion on Growth", JPE, 2017). [50 marks]

(a) Show mathematically that the growth effects of taxation are nonlinear in a heterogeneous-ability economy. [20 marks]

(b) How does the proposed theory explain the observation that the tax rates adopted by different countries are generally uncorrelated with their growth performance and the observation that coun- tries that drastically reduce private incentives to innovate and invest severely hurt their growth performance? [30 marks]