Abstract
This paper analyses the welfare effects of flat tax in a context of endogenous growth generated by learning-by-doing and knowledge spillovers. We present a model where a set of revenue neutral fiscal policies, each characterised by different degrees of investment deductibility and different uniform tax rates on income, have been introduced. We show that, given the ratio of public expenditures to national product, partial investment deductibility turns out to be welfare enhancing when the intertemporal elasticity of substitution of consumption is sufficiently small. Our result means that a pure consumption tax $-$ although ensuring more saving and faster growth $-$ is not always preferable to a revenue neutral tax system in which both consumption and investment are taxed.
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