GROWTH AND WELFARE MAXIMIZATION IN MODELS OF PUBLIC FINANCE AND ENDOGENOUS GROWTH

This paper evaluates the trade-off between growth and welfare maximization from two perspectives. First, it synthesizes and extends endogenous growth models with public finance to compare the growth- and welfare-maximizing tax rates. Second, it examines the distinct model outcomes in terms of the growth rates and welfare levels. This comparison highlights the range of trade-offs: the growth-maximizing tax rate can lie above, below, or on the welfare-maximizing equivalent. We find however that even relatively large differences in growth- and welfare-maximizing tax rates translate into relatively small differences in growth rates, and, in some cases, welfare levels.