This study constructs a variety expansion growth model with public research spending. Public researchers financed by taxes on asset income, consumption, and corporate profits raise the productivity of private research and development. We show that the welfare-maximizing level of public research spending is below the growth-maximizing level. With regard to tax policy, a zero-profit tax maximizes the welfare of households. In addition, the study analyzes the dynamics of the economy, showing that equilibrium is indeterminate when the government's revenue source depends on an asset income tax.
