Optimal Government Spending and Taxation in Three-Sector Endogenous Growth Model-Case Iran


1 University of Montreal, Montreal, Canada

2 Isfahan


The recent literature on taxation and growth has stressed the optimality of a zero long-run taxation on all accumulative factors of production. For a given path of government spending, the optimal tax plan requires the government to build up a positive stock of public wealth in the short run in the long-run, government spending can be financed with the income accruing from the management of the portfolio of public assets, rather than resorting to distortion taxation. In this study, following Barro (1990) and based on Corsetti and Roubini (1996) work that is explained and extended, we study the size of government productive in endogenous growth models. By describing competitive equilibrium and characteristics of equilibrium market in balanced- growth path, we determine the optimal government spending and optimal tax rates on physical capital and human capital. After determining balanced-growth path that along which human and physical capital growth at the same rate, we have determined optimal government spending and optimal tax rates by consider the effect of government spending, that specified in system and have a role of explanatory on productivity of human capital and physical capital in Iran. JEL Classification : O4, D62, C61, E17