Optimal Taxation in Models of Endogenous Growth

We study the problem of optimal taxation in horizon representative agent models of endogenous growth. The first model is a convex model with no externalities in which physical and human capital are perfectly symmetric in use and accumulation. We compute exact solutions to a finite horizon version of this model and find large growth and welfare effects of a shift from the current to the ramsey optimal tax policy. Our second model incorporates elastic labor supply through a lucas-style technology in which effective labor is produced by combining human capital, raw labor and market goods. In this model, there are large effects on growth, welfare and labor supply._x000B_ Our simulations of the first two models point out the dangers of assuming that government expenditures are exogenously given. Due to the growth effects of changes in the tax system, government expenditures shrink to a negligible fraction of output. In our third model, we include government expenditures as a productive input in capital formation, show that the limiting tax rate on capital is no longer zero, and find large growth and welfare effects in numerical simulations._x000B_