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Quantifying Optimal Growth Policy

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  • Grossmann, Volker
  • Steger, Thomas M.
  • Trimborn, Timo

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 oft heircapital 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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Bibliographic Info

Paper provided by Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland in its series FSES Working Papers with number 414.

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Length: 32 pages
Date of creation: 01 Jun 2010
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Handle: RePEc:fri:fribow:fribow00414

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  1. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110 Elsevier.
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Citations

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Cited by:
  1. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 516-534.
  2. Volker Grossmann & Thomas Steger & Timo Trimborn, 2011. "The Macroeconomics of TANSTAAFL," CESifo Working Paper Series 3651, CESifo Group Munich.
  3. Yu-Fu Chen & Michael Funke, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," Dundee Discussion Papers in Economics, Economic Studies, University of Dundee 236, Economic Studies, University of Dundee.
  4. Gómez, Manuel A. & Sequeira, Tiago N., 2014. "Should the US streamline its tax system? Analysis on an endogenous growth model," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 113-119.
  5. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-48, Scottish Institute for Research in Economics (SIRE).
  6. Grossmann, Volker & Steger, Thomas M., 2013. "Optimal growth policy: The role of skill heterogeneity," Economics Letters, Elsevier, Elsevier, vol. 119(2), pages 162-164.
  7. 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.
  8. Oudheusden, P. van, 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper, Tilburg University, Center for Economic Research 2012-084, Tilburg University, Center for Economic Research.

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