Optimal Taxation and Public Expenditure in a Model of Endogenous Growth

This paper analyses the optimal choice of fiscal policy in a model where public spending enters the production and utility functions and can be financed using flat rate taxes on consumption and on capital and labor incomes. Within this framework we generalize some previous results in the literature. Our results show that the optimal tax structure involves positive values of all the tax rates, which depend on structural parameters and how the returns to public capital are appropriated by private factors. We also conclude that the correct allocation of public spending is more important for welfare than the choice of the tax structure.