Endogenous Growth with Public Factors and Heterogeneous Human Capital Producers

If government revenues from a flat-rate income tax are spent on public factors and public factors are used for human capital production and human capital is used for the production of technical progress, then a higher rate of taxation will lead to a higher rate of technical progress if steady states are not unstable. If human capital producing households have different abilities they will have different desired (Lindahl) tax rates and a golden rule is no longer an acceptable welfare function. Therefore tax policy determines the rate of technical progress without a generally accepted welfare function. People with lower abilities want lower tax rates at least in the short run. When the rate of time preference is larger than the rate of technical progress people with greater abilities want higher levels of public factors and taxes also in the long run if indirect marginal utility is inelastic with respect to net income. The outcome of this political decision will determine the rate of technical progress.