DYNAMICS OF TAXES, PUBLIC SERVICES, AND ENDOGENOUS GROWTH

We present a model of endogenous growth in which government consumption and production services are financed by distorting capital taxes. We generalize Barro s public finance model of growth in two ways. First, we study the properties, and the role in growth, of a wider menu of second-best optimal policies, namely, the capital tax rate and the portion of total tax revenues used to finance public production services versus public consumption services. Second, we investigate the possibility of the existence and uniqueness of a long-run equilibrium in which optimal policies do not change and the economy grows at a constant balanced growth path, as well as the possibility of dynamic determinacy of this long-run equilibrium.