Public Finance in Models of Economic Growth

Robert Barro and Xavier Sala-i-Martin

No 630, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The recent literature on endogenous economic growth allows for the effects of fiscal policy on long-term growth. If the social rate of return on investment exceeds the private return, tax policies that encourage investment can raise the growth rate and levels of utility. An excess of the social return over the private return can reflect learning-by-doing with spillover effects, the financing of government consumption purchases with an income tax, and monopoly pricing of new types of capital goods. Tax incentives for investment are not called for if the private rate of return on investment equals the social return. This situation applies in growth models if the accumulation of a broad concept of capital does not entail diminishing returns, or if technological progress appears as an expanding variety of consumer products. In growth models that incorporate public services, the optimal tax policy hinges on the characteristics of the services. If the public services are publicly-provided private goods, that are rival and excludable, or publicly-provided public goods, that are non-rival and non-excludable, lump-sum taxation is superior to income taxation. Many types of public goods are subject to congestion, however, and are therefore rival but to some extent non-excludable. In these cases, income taxation works approximately as a user fee and can therefore be superior to lump-sum taxation. In particular, the incentives for investment and growth are too high if taxes are lump sum. We argue that the congestion model applies to a wide array of public expenditures, including transportation facilities, public utilities, courts and possibly national defence and the police.

Keywords: Economic Growth; Fiscal Policies; Public Finance (search for similar items in EconPapers)
JEL-codes: E62 H21 O40 (search for similar items in EconPapers)
Date: 1992-03
References: Add references at CitEc
Citations: View citations in EconPapers (586)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=630 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Public Finance in Models of Economic Growth (1992)
Working Paper: Public Finance in Models of Economic Growth (1991)
Working Paper: Public Finance in Models of Economic Growth (1990)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:630

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=630

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().