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Quantifying Optimal Growth Policy

  • Grossmann, Volker

    ()

    (University of Fribourg)

  • Steger, Thomas M.

    ()

    (University of Leipzig)

  • Trimborn, Timo

    ()

    (Leibniz University of Hannover)

The optimal mix of growth policies is derived within a comprehensive endogenous growth model. The analysis captures important elements of the tax-transfer system and takes into account 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5007.

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Length: 34 pages
Date of creation: Jun 2010
Date of revision:
Publication status: forthcoming in: Journal of Public Economic Theory, 2015 [Online First]
Handle: RePEc:iza:izadps:dp5007
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