POSTWAR BRITISH ECONOMIC-GROWTH AND THE LEGACY OF KEYNES

The policies used by Britain to finance World War II represented a dra matic departure from the policies used to finance earlier wars and wer e very different from the policies used by the United States during th e war. Following Keynes's recommendations, Britain taxed capital incom e at a much higher rate than the United States during the war and for much of the postwar period. We analyze quantitatively the policies des igned by Keynes using an endogenous growth model and the neoclassical growth model. We also evaluate the implications of tax-smoothing polic ies. We find that the welfare costs of Keynes's policies were very hig h relative to a tax-smoothing policy and argue that Britain's poor mac roeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income.