PUBLIC CAPITAL,TAXATION AND ENDOGENOUS GROWTH IN A FINITE HORIZONS MODEL

This paper presents development of an endogenously growing finite horizons model with public capital, and investigates macroeconomic effects of fiscal policy and a change in life expectancy. Specifically regarding novel results, a growth‐maximizing income tax rate exists that is less than the elasticity of public capital to output. In addition, in the model with income tax financing, there might exist an inverted‐U‐shaped relationship between life expectancy and growth, which is consistent with some empirical evidence. In this paper, we elucidate the interaction among public capital accumulation, taxes, growth, welfare and life expectancy.