IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_3092.html
   My bibliography  Save this paper

Quantifying Optimal Growth Policy

Author

Listed:
  • Volker Grossmann
  • Thomas Steger
  • Timo Trimborn

Abstract

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.

Suggested Citation

  • Volker Grossmann & Thomas Steger & Timo Trimborn, 2010. "Quantifying Optimal Growth Policy," CESifo Working Paper Series 3092, CESifo.
    • Handle: RePEc:ces:ceswps:_3092
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp3092.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Funke, Michael & Strulik, Holger, 2000. "On endogenous growth with physical capital, human capital and product variety," European Economic Review, Elsevier, vol. 44(3), pages 491-515, March.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Erik Plug & Wim Vijverberg, 2003. "Schooling, Family Background, and Adoption: Is It Nature or Is It Nurture?," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 611-641, June.
    4. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
    5. 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.
    6. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
    7. Trimborn, Timo & Koch, Karl-Josef & Steger, Thomas M., 2008. "Multidimensional Transitional Dynamics: A Simple Numerical Procedure," Macroeconomic Dynamics, Cambridge University Press, vol. 12(3), pages 301-319, June.
    8. 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.
    9. Charles I. Jones, 2002. "Sources of U.S. Economic Growth in a World of Ideas," American Economic Review, American Economic Association, vol. 92(1), pages 220-239, March.
    10. Norrbin, Stefan C, 1993. "The Relation between Price and Marginal Cost in U.S. Industry: A Contradiction," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1149-1164, December.
    11. Sandra E. Black & Paul J. Devereux & Kjell G. Salvanes, 2005. "Why the Apple Doesn't Fall Far: Understanding Intergenerational Transmission of Human Capital," American Economic Review, American Economic Association, vol. 95(1), pages 437-449, March.
    12. Zvi Griliches, 1998. "Interindustry Technology Flows and Productivity Growth: A Reexamination," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 241-250, National Bureau of Economic Research, Inc.
    13. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    14. Charles I. Jones & John C. Williams, 1998. "Measuring the Social Return to R&D," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1119-1135.
    15. Holger Strulik, 2007. "Too Much of a Good Thing? The Quantitative Economics of R&D‐driven Growth Revisited," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 369-386, June.
    16. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110, Elsevier.
    17. Scherer, F M, 1982. "Inter-Industry Technology Flows and Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 627-634, November.
    18. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    19. 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 11-44, August.
    20. Thomas M. Steger, 2005. "Welfare Implications of Non‐scale R&D‐based Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 737-757, December.
    21. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
    22. 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.
    23. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-768, June.
    24. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 516-534.
    2. Tiago Neves Sequeira & Alexandra Ferreira-Lopes, 2014. "Quantifying distortions from pollution in a R&D endogenous growth model," Estudios de Economia, University of Chile, Department of Economics, vol. 41(1 Year 20), pages 149-159, June.
    3. Manuel A. Gómez & Tiago Neves Sequeira, 2016. "R&D Subsidies and Foreign Direct Investment," Open Economies Review, Springer, vol. 27(4), pages 769-793, September.
    4. Lin, Hwan C., 2016. "The switch from patents to state-dependent prizes for technological innovation," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 193-223.
    5. Böhm, Sebastian & Grossmann, Volker & Steger, Thomas M., 2014. "Does Public Education Expansion Lead to Trickle-Down Growth?," FSES Working Papers 452, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    6. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers 2010-48, Scottish Institute for Research in Economics (SIRE).
    7. Schünemann, Johannes & Trimborn, Timo, 2023. "Boosting taxes for boasting about houses? Status concerns in the housing market," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 120-143.
    8. Böhm, Sebastian & Grossmann, Volker & Steger, Thomas M., 2015. "Does expansion of higher education lead to trickle-down growth?," Journal of Public Economics, Elsevier, vol. 132(C), pages 79-94.
    9. Grossmann, Volker & Steger, Thomas M., 2013. "Optimal growth policy: The role of skill heterogeneity," Economics Letters, Elsevier, vol. 119(2), pages 162-164.
    10. Werner, Katharina & Prettner, Klaus, 2014. "Human capital, basic research, and applied research: three dimensions of human knowledge and their differential growth effects," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100448, Verein für Socialpolitik / German Economic Association.
    11. Kirsten Svenja Wiebe, 2012. "The Human Development Index and an endogenous growth model," EcoMod2012 4365, EcoMod.
    12. Gómez, Manuel A. & Sequeira, Tiago N., 2014. "Should the US streamline its tax system? Analysis on an endogenous growth model," Economic Modelling, Elsevier, vol. 37(C), pages 113-119.
    13. Trimborn, Timo, 2018. "On the analysis of endogenous growth models with a balanced growth path," Journal of Mathematical Economics, Elsevier, vol. 79(C), pages 40-50.
    14. Takaaki Morimoto, 2018. "Occupational choice and entrepreneurship: effects of R&D subsidies on economic growth," Journal of Economics, Springer, vol. 123(2), pages 161-185, March.
    15. Kiyoka Akimoto & Takaaki Morimoto, 2017. "Examination and Approval of New Products in an Endogenous Growth Model," Discussion Papers in Economics and Business 17-33, Osaka University, Graduate School of Economics.
    16. van Oudheusden, P., 2012. "Dynamic Scoring Through Creative Destruction," Other publications TiSEM 13955715-2cbb-443b-a099-9, Tilburg University, School of Economics and Management.
    17. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2013. "The macroeconomics of TANSTAAFL," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 76-85.
    18. van Oudheusden, P., 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.
    19. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2023. "The long‐run investment effect of taxation in OECD countries," Economica, London School of Economics and Political Science, vol. 90(358), pages 584-611, April.
    20. Prettner, Klaus & Werner, Katharina, 2016. "Why it pays off to pay us well: The impact of basic research on economic growth and welfare," Research Policy, Elsevier, vol. 45(5), pages 1075-1090.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 516-534.
    2. Böhm, Sebastian & Grossmann, Volker & Steger, Thomas M., 2015. "Does expansion of higher education lead to trickle-down growth?," Journal of Public Economics, Elsevier, vol. 132(C), pages 79-94.
    3. Sener, Fuat, 2008. "R&D policies, endogenous growth and scale effects," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3895-3916, December.
    4. Böhm, Sebastian & Grossmann, Volker & Steger, Thomas M., 2014. "Does Public Education Expansion Lead to Trickle-Down Growth?," FSES Working Papers 452, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    5. Benjamin Montmartin & Nadine Massard, 2015. "Is Financial Support For Private R&D Always Justified? A Discussion Based On The Literature On Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 479-505, July.
    6. Richard M. H. Suen, 2013. "Research Policy and U.S. Economic Growth," Working papers 2013-18, University of Connecticut, Department of Economics.
    7. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2013. "The macroeconomics of TANSTAAFL," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 76-85.
    8. Volker Grossmann & Thomas Steger, 2007. "Growth, Development, and Technological Change," CESifo Working Paper Series 1913, CESifo.
    9. Bucci, Alberto, 2013. "Returns to specialization, competition, population, and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2023-2040.
    10. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2023. "The long‐run investment effect of taxation in OECD countries," Economica, London School of Economics and Political Science, vol. 90(358), pages 584-611, April.
    11. Klenow, Peter J. & Rodriguez-Clare, Andres, 2005. "Externalities and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 11, pages 817-861, Elsevier.
    12. Bettina Büttner, 2006. "Effectiveness versus Efficiency: Growth‐Accelerating Policies in a Model of Growth without Scale Effects," German Economic Review, Verein für Socialpolitik, vol. 7(3), pages 297-316, August.
    13. Bucci, Alberto & Parello, Carmelo Pierpaolo, 2009. "Horizontal innovation-based growth and product market competition," Economic Modelling, Elsevier, vol. 26(1), pages 213-221, January.
    14. Alberto Bucci, 2014. "Population, competition, innovation, and economic growth with and without human capital investment," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(1), pages 61-84, April.
    15. Gómez, Manuel A. & Sequeira, Tiago N., 2013. "Optimal R&D subsidies in a model with physical capital, human capital and varieties," Economic Modelling, Elsevier, vol. 30(C), pages 217-224.
    16. Prettner, Klaus, 2013. "Public education, technological change and economic prosperity," University of Göttingen Working Papers in Economics 149, University of Goettingen, Department of Economics.
    17. Alberto Bucci, 2005. "Product Market Competition, R&D Effort and Economic Growth," UNIMI - Research Papers in Economics, Business, and Statistics unimi-1011, Universitá degli Studi di Milano.
    18. Boikos, Spyridon & Bucci, Alberto & Stengos, Thanasis, 2022. "Leisure and innovation in horizontal R&D-based growth," Economic Modelling, Elsevier, vol. 107(C).
    19. Tiago Sequeira, 2012. "Facts and distortions in an endogenous growth model with physical capital, human capital and varieties," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 11(3), pages 171-188, December.
    20. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.

    More about this item

    Keywords

    economic growth; endogenous technical change; optimal growth policy; tax-transfer system; transitional dynamics;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3092. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.