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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, C-I & Williams, J-C, 1996. "Too Much of a Good Thing? The Economics of Investment in R&D," Papers 538, Harvard - Institute for International Development.
  8. 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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  12. 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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  18. Michael Funke & Holger Strulik, 2000. "On Endogenous Growth with Physical Capital, Human Capital and Product Variety," Quantitative Macroeconomics Working Papers 20004, Hamburg University, Department of Economics.
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  23. 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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