HOW SHOULD THE GOVERNMENT ALLOCATE ITS TAX REVENUES BETWEEN PRODUCTIVITY-ENHANCING AND UTILITY-ENHANCING PUBLIC GOODS?

George Economides, Hyun Park and Apostolis Philippopoulos

Macroeconomic Dynamics, 2011, vol. 15, issue 3, 336-364

Abstract: 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.

Date: 2011
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Working Paper: How should the government allocate its tax revenues between productivity-enhancing and utility-enhancing public goods? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:15:y:2011:i:03:p:336-364_00

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