A contribution to optimal taxation theory

Currently in our globalized world and modernized societies, economic development is becoming one of the main goals of economic policymakers in order to provide nations with highest possible level of prosperity and improved living standards. Public economics as being one of the important parts of the economy, in recent years, has, to some extent, an impact on economic development. Specifically, core part of the public economics, taxation, have been influencing growth path of the economy since the first initiation of it. With respect to this, current paper mainly tries to contribute to the optimal tax theory literature by trying to establish a mathematical model that can calculate optimal level of different types of tax rates, such as personal income tax and consumption tax, which eventually leads to steady state level of economic growth in the long run. As it already obvious, by optimal it is meant that the certain level of tax rate that may push economic growth to its golden steady state level in the long run[22]. An undisputable fact that needs to be included here is that the mathematical model constructed mainly based on golden rule of saving of basic Solow model of economic growth along with basic consumption/saving theory of macroeconomics. Specifically, mathematical model tries to develop basic Solow model of economic growth by adjusting it for possible effects of public economics and taxation. Besides, noteworthy point to emphasize here is that taxation can be a very useful tool that can increase aggregate saving level in the economy towards its golden rate, especially in developing countries, by properly controlling and resetting different types of tax rates based on the households’ and government’s marginal propensity to save.