Optimal Growth Taxation

Abstract

Government usually tends to have two options. They can either pursue a tax revenue maximizing strategy or a growth maximizing strategy. The two approached do not necessarily go hand in hand. This paper derives and empirically estimates a simple laissez faire optimal taxation model from the perspective of economic growth. The finding is that governments tend to systematically over tax the economy which leads to suboptimal allocations. Politicians tend to prefer high taxation over a cut in public spending i.e. a reduction in public sector jobs.