Growth, Taxation and Public Finance

In economics the relationship between economic growth, debt, taxation and spending is an important one. In this paper we will use an optimal control model to analyze such relationship further. We find that lowering the tax rate is the only strategy that will increase growth and on the same time decrease debt levels for a government. High taxes tend to removes capital from the private sector which reduces the private sectors willingness to take risk i.e. innovate which reduces economic growth. Government spending will create economic growth in the short run but such policy will also increase debt levels