Public Finance in Models of Economic Growth

Robert J. Barro and Xavier X. Sala-i-Martin

Review of Economic Studies; v59 n4 October 1992, pp. 645-61.


In growth models that incorporate public services, the optimal tax policy hinges on the characteristics of the services. If the public services are publicly-provided private goods, that are rival and excludable, or publicly- provided public goods, that are non-rival and non-excludable, lump-sum taxation is superior to income taxation. Many types of public goods are subject to congestion, however, and are therefore rival but to some extent non-excludable. In these cases, income taxation works approximately as a user fee and can therefore be superior to lump-sum taxation. We argue that the congestion model applies to a wide array of public expenditures.


One, Two, and Multisector Growth Models, O410. Macroeconomic Aspects of Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation, E620. Multisector Growth Models and Related Topics, 1113. One and Two Sector Growth Models and Related Topics, 1112. Fiscal Theory; Empirical Studies Illustrating Fiscal Theory, 3212.