Optimal taxation in a growth model with public consumption and home production

Jie Zhang, James Davies, Jinli Zeng () and Stuart McDonald ()

No 1707, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

Abstract: In a neoclassical growth model with public consumption, we show the following Pareto optimal tax rules. The government should tax leisure and private consumption at the same rate, and subsidize net investment at the same rate it taxes net capital income. Also, it should tax capital income more heavily than labor income. In an extension for home production, the additional rule is to tax investment for home production at the same rate of the tax on private market consumption. These tax and subsidy rates should be constant over time except the initial tax rate on capital income.

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Journal Article: Optimal taxation in a growth model with public consumption and home production (2008)
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