By providing public goods, including law and order, national defense, and income redistribution that expands the gains from exchange (the scope and membership of the constitutional agreement), government expenditures act as a positive externality on the growth rate. Beyond that level, taxes act as a negative externality. In this paper a simple model is formulated and the optimal (growth-maximizing) tax rate found. Empirical estimation finds it to be in the range of 21.5–22.9 percent. The effect of taxation beyond this level is a cumulative loss of about $30 trillion (1972 dollars) in GNP over the period 1949–89.