Quantifying Optimal Growth Policy
University of Fribourg - Faculty of Economics and Social Science; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Thomas Michael Steger
University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Hamburg - Faculty of Economics and Business Administration
June 17, 2010
CESifo Working Paper Series No. 3092
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 huge welfare gains.
Number of Pages in PDF File: 37
Keywords: economic growth, endogenous technical change, optimal growth policy, tax-transfer system, transitional dynamics
JEL Classification: H20, O30, O40working papers series
Date posted: June 20, 2010
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