Growth and welfare effects of fiscal policy in a endogenous growth model with public investment

In this paper we analyze growth and welfare effects of fiscal policy in an endogenous growth model along the balanced growth path. As to the model we assume that sustained per capita growth results from public investment. The government uses its tax income for investment in public capital, for investment subsidy and for transfer payments. It is shown that there exists a growth maximizing income tax rate and a growth maximizing investment subsidy whereas increasing transfer payments always reduces economic growth. Further, a tax on consumption raises the balanced growth rate if the additional tax income is used for public investment. Moreover, we demonstrate that maximizing economic growth is not equivalent to maximizing welfare and we derive the values of the fiscal parameters which maximize welfare