The golden rule savings rate is that savings rate which makes the most of growth of consumption or steady state level. Going by the Solow growth model, a steady state savings rate of 100 percent means that every income will be directed to investment capital for production in the future, meaning a steady state consumption level of zero. With a savings rate of 0 percent; the implication is that there is no creation of new investment capital, to the end that the capital stock looses value without replacement. This results to a steady state of not being able to be sustained, except at zero output – this also denotes a consumption level of zero. At a point in between, exists the golden rule level of savings where the savings tendency is at its maximum possible constant value.

Policy That Can Vary the Savings Rate
Different economic policies can impact the savings rate, and given data as to whether an economy is achieving too much savings or saving little either, can subsequently be used to examine or make a move towards the golden rule level of savings. For instance, consumption taxes may decrease the level of consumption and raise the rate for savings; on the other hand, capital gains taxes may bring down savings rate. In the West, these policies are frequently called savings incentives, where it is perceived that the existing savings rate is very low – lower than the golden rule rate. A consumption incentive in countries such as Japan where demand is generally seen to be very weak since the rate for savings is very higher above the golden rule.

Private and public saving: the high rate of private saving in Japan is offset by its high public debt. An easy approximation of this is that the government has borrowed 100 percent of GDP from its citizens supported with the promise to pay from taxation in the future. This does not really result to capital formation via investment – perhaps the revenue from bond sales is expended on present government consumption instead of infrastructure development.

Golden Rule Taxes in Economic Models
In the situation where consumption tax rates are expected to be permanent, then, it is difficult to make right the popular hypothesis that rising rates dissuade consumption with rational expectations – owing to the fact that the main objective of saving is consumption. Notwithstanding, consumption taxes seem to vary – for instance, when government changes, or when there is movement between countries. Therefore, recently high consumption taxes may be looked forward to vanish at certain point in the future providing a raised incentive for saving. The effective level of capital income tax in the steady state has been examined in the situation of a general equilibrium model; the optimal tax rate has been shown to be zero by Judd (1985). On the other hand, Chamley (1986) is of opinion that in order to reach the steady state in the short run, a high capital income tax is an effective source of revenue.