Abstract
When optimal trajectories are followed, what is the appropriate income tax rate on external debt? This study offers explanation to this question from the perspective of optimal control of external debt for a developing economy. The study proposes to use the methods of continuous-time optimal control theory to determine the external debt path wherein the welfare of the household sector is maximised over a given horizon. The implications of the obtained results are stated. The utility of the optimal debt policy is illustrated for the Nigerian case and the income tax rate that is consistent with the optimal external debt path is identified using the Kolmogorov–Smirnov test statistic. The analysis finds that there is a tendency for the optimal debt stock to fall as the income tax rate is increased.
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