Author(s): Amaro, Pedro
Date: 2024
Persistent ID: http://hdl.handle.net/10400.14/45282
Origin: Veritati - Repositório Institucional da Universidade Católica Portuguesa
Subject(s): Exogenous spending; Endogenous growth; Separability assumption; Optimal financing policy; Gastos exógenos; Crescimento endógeno; Pressuposto de separabilidade; Política ótima de financiamento
The literature of endogenous growth yields atypical solutions for optimal Ąnancing policies. In an environment with productive, exogenous spending, it is optimal to levy capital-income taxes, even if the government has access to non-distortionary instruments. Furthermore, when government spending approaches its optimal value, the capital income tax converges to zero. These results contradict the underlying assumption that the governmentŠs Ąnancing and spending decisions can be made independently of each other. The literature cannot properly explain this result, nor does it grasp its economic signiĄcance. I show these results are not inherent to the models used to derive them. In fact, they stem from the assumption of exogenous spending, speciĄcally how it is set. The common framework in the endogenous growth literature is to set government spending as an exogenous share of output. When considering a reasonable deviation on this assumption, I show that non-distortionary taxes are indeed an optimal Ąnancing instrument. Thus, it is possible to implement optimal economic trajectories, while verifying the separability assumption.
