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Quantifying Optimal Growth Policy

  • Volker Grossmann
  • Thomas Steger
  • Timo Trimborn

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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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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