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Optimal taxation in a growth model with public consumption and home production

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Author Info
Jie Zhang () (MRG - School of Economics, The University of Queensland)
James Davies (Department of Economics, University of Western Ontario)
Jinli Zeng (Department of Economics, National University of Singapore)
Stuart McDonald (Department of Economics, California Institute of Technology)

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Abstract

In a neoclassical growth model with public consumption, we show the following Pareto optimal tax rules. The government should tax leisure and private consumption at the same rate, and subsidize net investment at the same rate it taxes net capital income. Also, it should tax capital income more heavily than labor income. In an extension for home production, the additional rule is to tax investment for home production at the same rate of the tax on private market consumption. These tax and subsidy rates should be constant over time except the initial tax rate on capital income.

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Paper provided by School of Economics, University of Queensland, Australia in its series MRG Discussion Paper Series with number 1707.

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