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Optimal tax and expenditure policies in a market economy with life-cycle savings: Revisiting the golden rule

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  • Howell H. Zee

Abstract

Purpose - This paper aims to investigate whether the concept of the golden rule of capital accumulation is an applicable normative guidepost for a market economy even in the absence of the distortions usually associated with income and consumption taxes. Design/methodology/approach - The paper uses a simple two-period overlapping generations model with productive public and private capital. Findings - As long as the government is subject to some instrument limitation that constrains its ability to effect non-distortive optimal inter-generational income redistributions, the market optimum for capital accumulation would generally deviate from the golden rule towards either side of the rule. Originality/value - The paper provides a transparent characterization of the nature of the optimal deviation from the golden rule in terms of easily interpretable consumption and production parameters.

Suggested Citation

  • Howell H. Zee, 2009. "Optimal tax and expenditure policies in a market economy with life-cycle savings: Revisiting the golden rule," Journal of Economic Studies, Emerald Group Publishing, vol. 36(3), pages 265-283, July.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:3:p:265-283
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    Keywords

    Tax planning; Public finance; Economic growth;

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