Optimal Taxation in Models of Endogenous Growth

Abstract

We study the problem of optimal taxation in three infinite-horizon, representative-agent endogenous growth models. The first model is a convex model in which physical and human capital are perfectly symmetric. Our second model incorporates elastic labor supply through a Lucas-style technology. Analysis of these two models points out the danger of assuming that government expenditures are exogenous. In our third model, we include government expenditures as a productive input in capital formation, showing that the limiting tax rate on capital is no longer zero. In numerical simulations, we find similar effects on growth and welfare in all three models.