Optimal tax structure and public expenditure composition in a simple model of endogenous growth

In this paper, using an endogenous growth model where the structural relationship between public expenditures and taxes is considered, we investigate how the optimal tax structure is determined by public spending structure. Public spending provides two public goods, public service and public capital that impact production, the former as a flow, the latter as a stock, and these can be financed by flat rate taxes on consumption and income. Our theoretical model suggests that the optimal tax structure is equivalent to the public spending composition. Our numerical example provides a further proof for the theoretical propositions. •We contribute to the ongoing debate on the structural relationship between public expenditures and taxes.•The model shows the tax structure is equivalent to public spending composition.•The main finding is that the optimal tax structure is determined by public spending composition.