JOURNALOF PUBLIC ECONOMICS EI~SEVIER Journal of Public Economics 60 (1996) 21-44 Optimal tax, debt, and expenditure policies in a growing economy Stephen J. Turnovsky Department of Economics, 301 Savery Hall, University of Washington, Seattle, WA 98195, USA Received May 1993; final version received April 1995 Abstract This paper employs an endogenous growth model to analyze the role of a consumption tax in enhancing growth and welfare. Provided government expenditure impacts directly on the decisions of private agents, two fiscal instruments are necessary to replicate the first best optimum. The tradeoff between consumption and income taxes to achieve this outcome is discussed and shown to depend upon the degree of congestion associated with the public good and the level of government expenditure relative to its social optimum. In general, the analysis suggests a potentially important role for a consumption tax as part of an overall optimal fiscal package. Keywords: Growth; Welfare; Taxes; Government expenditure JEL classification: E62; E21 I. Introduction Recent US economic experience has been characterized by a low growth rate and a low savings rate. During the decade of the 1980s the annual growth rate of real GNP averaged around 2.6% while during the same period the personal savings rate averaged around 6.5%. 1 Both these figures These figures are obtained from the 1993 US Economic Report of the President; see Tables B-2 and B-24. 0047-2727/96/$15.00 (~ 1996 Elsevier Science S.A. All rights reserved SSDI 0047-2727(95)01519-1