How Should The Government Allocate Its Tax Revenues Between Productivity-Enhancing And Utility-Enhancing Public Goods?
We present a fairly standard general equilibrium model of endogenous growth with productive and nonproductive public goods and services. The former enhance private productivity and the latter private utility. We study Ramsey second-best optimal policy, where the latter is summarized by the paths of the income tax rate and the allocation of collected tax revenues between productivity-enhancing and utility-enhancing public expenditures. We show that the properties and macroeconomic implications of the second-best optimal policy (a) are different from the benchmark case of the social planner's first-best allocation and (b) depend crucially on whether public goods and services are subject to congestion.
Volume (Year): 15 (2011)
Issue (Month): 03 (June)
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