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Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth

Authors


  • We are grateful to Debajyoti Chakrabarty, John Creedy, Rod Falvey, seminar participants in Melbourne and Nottingham and participants of the CSAE Conference 2008 and the 13th Australasian Macroeconomics Workshop in Sydney for helpful discussions and comments on earlier drafts of the paper.

Abstract

This paper evaluates the trade-off between growth and welfare maximization from two perspectives. First, it synthesizes and extends endogenous growth models with public finance to compare the growth- and welfare-maximizing tax rates. Second, it examines the distinct model outcomes in terms of the growth rates and welfare levels. This comparison highlights the range of trade-offs: the growth-maximizing tax rate can lie above, below, or on the welfare-maximizing equivalent. We find however that even relatively large differences in growth- and welfare-maximizing tax rates translate into relatively small differences in growth rates, and, in some cases, welfare levels.

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