Golden Rule, Non-distortional Tax and Governmental Transfer

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We consider the combination of non-distortional taxes (subsidies), a consumption tax and a wage income tax, in an overlapping-generations model to investigate how the rates of these taxes should be set to achieve a golden rule level of capital stock. We prove that if the initial steady state level of capital is below (above) the golden rule, the wage income tax rate should be negative (positive) and the consumption tax rate should be positive (negative) both at the steady state and along with the transitional path to the new steady state. We then show that, in transition, individuals can obtain benefit (loss) of a positive (negative) net transfer from (to) the government. In proving, a capital market equilibrium condition is necessary.

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