Does Paragon level affect drop rate?

Assume I complete GR70 with Paragon level 500. I continue to run the same GR70 but now I am Paragon level 600.

Is the drop rate of GR70 reduced because of higher Paragon level? In other words, is there a penalty for farming lower difficulties as you continue to increase your power?

At level 70, the drop rate of legendaries and other useful items is based solely on the difficulty that you are playing on. GR 70 is equivalent to Torment XV. The item pool increases from when you start playing until you reach 70, but it never changes after that, aside from adding the possibility to get primal ancient legendaries after you complete a GR 70 solo.

As your paragon level goes up, it should be easier to complete higher Torment levels which should in turn give you better drops and more experience. If you want the best loot, you should play on the hardest difficulty that you can defeat enemies reasonably quickly.