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Optimal tax structure and public expenditure composition in a simple model of endogenous growth

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  • Zhang, Lifeng
  • Ru, Yucong
  • Li, Jingkui

Abstract

In this paper, using an endogenous growth model where the structural relationship between public expenditures and taxes is considered, we investigate how the optimal tax structure is determined by public spending structure. Public spending provides two public goods, public service and public capital that impact production, the former as a flow, the latter as a stock, and these can be financed by flat rate taxes on consumption and income. Our theoretical model suggests that the optimal tax structure is equivalent to the public spending composition. Our numerical example provides a further proof for the theoretical propositions.

Suggested Citation

  • Zhang, Lifeng & Ru, Yucong & Li, Jingkui, 2016. "Optimal tax structure and public expenditure composition in a simple model of endogenous growth," Economic Modelling, Elsevier, vol. 59(C), pages 352-360.
    • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:352-360
    DOI: 10.1016/j.econmod.2016.08.005
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    More about this item

    Keywords

    Public spending composition; Tax structure; Growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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