Assume that the labour force is fully employed2 so that L = N(1 + l). Government
funds are raised by proportional taxes at rate sL on labour income, p*[F(K,L) Kf 0
(K/
L)], and sK on capital income, p*Kf 0
(K/L), and that government spending per head is
simply constant at G so that the government budget constraint requires