THE GROWTH TAX IN THE UNITED-STATES

By providing public goods, including law and order, national defense, and income redistribution that expands the gains from exchange (the scope and membership of the constitutional agreement), government expenditures act as a positive externality on the growth rate. Beyond that level, taxes act as a negative externality. In this paper a simple model is formulated and the optimal (growth-maximizing) tax rate found. Empirical estimation finds it to be in the range of 21.5-22.9 percent. The effect of taxation beyond this level is a cumulative loss of about $30 trillion (1972 dollars) in GNP over the period 1949-89.