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Optimal fiscal policies in an economy with externalities from public spending

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  • Chia-Hui Lu

Abstract

This paper examines the optimal fiscal policies in an economy with externalities from government expenditure. We extend Lucas (Oxf Econ Pap 42:293–316, 1990 ) two-sector endogenous growth model and consider the spillover effects from the public spending on infrastructure and education. We compare the optimal fiscal policies derived from the Ramsey allocation problem with those in the centrally-planned economy. The results of this paper are as follows. First, the optimal share of public spending on infrastructure is smaller than its relative contribution in the production function. Next, the optimal share of public spending on education is smaller than its relative contribution in the accumulation of human capital, and does not affect the tax rate of capital income. Finally, the optimal tax rate of capital income is positive if the externality from public productive spending exists. Copyright Springer-Verlag Wien 2015

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  • Chia-Hui Lu, 2015. "Optimal fiscal policies in an economy with externalities from public spending," Journal of Economics, Springer, vol. 116(3), pages 211-228, November.
    • Handle: RePEc:kap:jeczfn:v:116:y:2015:i:3:p:211-228
    DOI: 10.1007/s00712-015-0433-9
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    1. Narcis BRANDUSESCU, 2018. "The Analysys Of Romanian Government Investment Expenditure In 2008 – 2017 Interval," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 17(3), pages 119-124.

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    More about this item

    Keywords

    Fiscal policy; Optimal taxation; Externality; Two-sector growth model; E62; H21; H23; O41;
    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
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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