On the Theory of Optimal Taxation in a Growing Economy

This paper considers the following question: Would a "golden rule" capital accumulation policy of equating the marginal product of capital to the rate of growth of population be appropriate in a mixed economy in which the government does not have direct control over resource allocation but can use distortionary taxes to obtain resources for augmenting the private capital stock? The key result derived hereis that the golden rule level of capital intensity remains optimal if the tax structure that prevails at the equilibrium does not alter the individual labor supply. This is true even if the constancy of labor supply represents a balancing of income effects and substitution effects of a distortionary tax. In contrast, if the form of the tax and the nature of the utility function imply that labor supply is distorted, the optimal capital intensity will in general not correspond to the golden rule level.