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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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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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  10. Holger Strulik, 2005. "Too Much of a Good Thing? The Quantitative Economics of R&D–driven Growth Revisited," Discussion Papers 05-26, University of Copenhagen. Department of Economics.
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  12. 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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