Working Paper: NBER ID: w1435
Authors: Martin Feldstein
Abstract: This paper considers the following question: Would a "golden rule" capital accumulation policy of equating the marginal product of capital to the rate of growth of population be appropriate in a mixed economy in which the government does not have direct control over resource allocation but can use distortionary taxes to obtain resources for augmenting the private capital stock? The key result derived hereis that the golden rule level of capital intensity remains optimal if the tax structure that prevails at the equilibrium does not alter the individual labor supply. This is true even if the constancy of labor supply represents a balancing of income effects and substitution effects of a distortionary tax. In contrast, if the form of the tax and the nature of the utility function imply that labor supply is distorted, the optimal capital intensity will in general not correspond to the golden rule level.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax structure does not distort labor supply (H31) | Golden rule level of capital intensity remains optimal (D25) |
| Government raises tax revenue (H29) | Golden rule condition is not optimal unless labor supply remains fixed (F16) |
| Tax system distorts labor supply (H31) | Golden rule will not be optimal (C61) |
| Government establishes correct macroeconomic level of capital intensity (E22) | Individuals allocate income correctly between present and future consumption (D15) |
| Linear tax on labor income (H31) | Government influences capital accumulation (E22) |