Growth, public expenditure composition and tax mix in an endogenous growth economy

Abstract

In a one-sector endogenous growth model with public and private capital, we study the relationship between the public expenditure composition (public consumption to public investment ratio), the tax-mix (direct to indirect tax ratio) and economic growth. For a set of OECD economies, we .nd that the observed coevolution among these variables over the last forty years can be understood as part of an optimal reaction of the tax policy to changes in the composition of public expenditures. While public disbursements have become less intensive in public investment, relative to less productive items, tax systems have become more intensive in direct taxation, relative to indirect taxation. This change in the .scal policy might have caused, at least partially, the economic deceleration that developed economies have experienced over the last forty years.