This paper investigates optimal taxation in a disaggregated neoclassic
al growth model. Optimal tax rules for a government, which must financ
e an exogenous stochastic stream of spending, are investigated. Many l
ocally optimal rules are found and two principles, which provide usefu
l guidance into interpreting them, are described. These principles sta
te that high steady state investment and small investment volatility a
re desired. A persistent income tax policy suggested by Judd (1989) is
found to be among the best policies, Although some policies with comp
licated dynamic implications have similar welfare levels, because of i
ts simplicity, the persistent income tax rule is recommended.