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Quantifying Optimal Growth Policy

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

This paper develops a comprehensive endogenous growth framework to determine the optimal mix of growth policies. The analysis is novel in that we capture important elements of the tax-transfer system and fully take into account transitional dynamics in our numerical analysis. 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 the status quo 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 from sales revenue. Implementing the optimal policy mix is likely to entail huge welfare gains.

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File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-440.pdf
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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-440.

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Length: 57 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:han:dpaper:dp-440
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  7. Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111 Elsevier.
  8. Charles I. Jones & John C. Williams, 1999. "Too Much of a Good Thing? The Economics of Investment in R&D"," Working Papers 99015, Stanford University, Department of Economics.
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  11. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
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  13. Papageorgiou, Chris & Perez-Sebastian, Fidel, 2006. "Dynamics in a non-scale R&D growth model with human capital: Explaining the Japanese and South Korean development experiences," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 901-930, June.
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  15. Karl-Josef Koch & Timo Trimborn & Thomas M. Steger, 2005. "Multi-Dimensional Transitional Dynamics: A Simple Numerical Procedure," Volkswirtschaftliche Diskussionsbeiträge 121-05, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  16. Norrbin, S.C., 1993. "The Relation Between Price and Marginal Cost in U.S. Industry: A Contradiction," Working Papers 1993_05_04, Department of Economics, Florida State University.
  17. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
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  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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  23. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August.
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