Application of Ramsey's growth theory to optimal taxation

One effective approach to preventing significant budget deficits is to control government spending by implementing appropriate tax rates. The theory of growth established by F. Ramsey serves as the foundation for this research. This study aims to determine the optimal tax rate by solving an optimal control problem constrained by equations governing capital accumulation and government spending. To achieve this objective, an extended version of the Ramsey growth model is employed, incorporating three key assumptions. First, the utility function is assumed to depend on per capita consumption and government spending, following an exponential form. Second, per capita government spending is modeled as an autoregressive process. Third, the production function is characterized by non-constant returns to scale. Numerical results based on Mongolian statistical data from 2000 to 2023 indicate that the optimal tax rate is approximately 26.5 percent. This methodology for determining the optimal tax rate provides a valuable tool for policymakers and managers to effectively manage future budget expenditures in any country.