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Quantifying Optimal Growth Policy

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  • Volker Grossmann
  • Thomas Steger
  • Timo Trimborn

Abstract

The optimal mix of growth policies is determined within a comprehensive endogenous growth model. The analysis captures important elements of the tax-transfer system and accounts for transitional dynamics. Currently, for calculating corporate taxable income US firms are allowed to deduct approximately all of their capital and R&D costs from sales revenue. Our analysis suggests that this policy leads to severe underinvestment in both R&D and physical capital. We find that firms should be allowed to deduct between 2-2.5 times their R&D costs and about 1.5-1.7 times their capital costs. Implementing the optimal policy mix is likely to entail huge welfare gains.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3092.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3092.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3092

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Keywords: economic growth; endogenous technical change; optimal growth policy; tax-transfer system; transitional dynamics;

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References

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  1. Trimborn, Timo & Koch, Karl-Josef & Steger, Thomas M., 2008. "Multidimensional Transitional Dynamics: A Simple Numerical Procedure," Macroeconomic Dynamics, Cambridge University Press, vol. 12(03), pages 301-319, June.
  2. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-68, June.
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  7. Holger Strulik, 2005. "Too Much of a Good Thing? The Quantitative Economics of R&D–driven Growth Revisited," Discussion Papers 05-26, University of Copenhagen. Department of Economics.
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  18. Thomas M. Steger, 2005. "Welfare Implications of Non-scale R&D-based Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 737-757, December.
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Citations

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Cited by:
  1. Oudheusden, P. van, 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.
  2. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 516-534.
  3. Michael Funke & Yu-Fu Chen, 2010. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers 21007b, Hamburg University, Department of Economics.
  4. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2013. "The macroeconomics of TANSTAAFL," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 76-85.
  5. Grossmann, Volker & Steger, Thomas M., 2013. "Optimal growth policy: The role of skill heterogeneity," Economics Letters, Elsevier, vol. 119(2), pages 162-164.
  6. Prettner, Klaus & Werner, Katharina, 2014. "Human capital, basic research, and applied research: Three dimensions of human knowledge and their differential growth effects," Center for European, Governance and Economic Development Research Discussion Papers 186, University of Goettingen, Department of Economics.
  7. Gómez, Manuel A. & Sequeira, Tiago N., 2014. "Should the US streamline its tax system? Analysis on an endogenous growth model," Economic Modelling, Elsevier, vol. 37(C), pages 113-119.

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