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Quantifying Optimal Growth Policy

  • Volker Grossmann
  • Thomas M. 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 welfare gains.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_051.

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Length: 31 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:deg:conpap:c015_051
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