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Quantifying Optimal Growth Policy

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Author Info

  • Grossmann, Volker

    ()
    (University of Fribourg)

  • Steger, Thomas M.

    ()
    (University of Leipzig)

  • Trimborn, Timo

    ()
    (Leibniz University of Hannover)

Abstract

The optimal mix of growth policies is derived within a comprehensive endogenous growth model. The analysis captures important elements of the tax-transfer system and takes into account 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5007.

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Length: 34 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5007

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

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Citations

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Cited by:
  1. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2011. "The macroeconomics of TANSTAAFL," Working Papers 101, University of Leipzig, Faculty of Economics and Management Science.
  2. Michael Funke & Yu-Fu Chen & Aaron Mehrota, 2011. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers 21105, Hamburg University, Department of Economics.
  3. Grossmann, Volker & Steger, Thomas M., 2012. "Optimal growth policy: The role of skill heterogeneity," Working Papers 117, University of Leipzig, Faculty of Economics and Management Science.
  4. Oudheusden, P. van, 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.
  5. 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.
  6. 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.
  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.

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