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Sustainability of Public Debt in an AK Model with Complex Tax System

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  • Atsumasa Kondo

    (Faculty of Economics, Shiga University)

Abstract

This paper theoretically investigates the role of the tax system in sustaining the public debt. The paper explicitly derives the critical level of the public debt-to-GDP ratio that is compatible with a balanced growth path. If the ratio exceeds this critical level at time 0, then it diverges to +∞ as time passes. Analyzing a situation where the government marginally increases the consumption tax rate, the paper reveals the extent to which the government can then cut the income tax rate while maintaining the sustainability of public debt. Tax rates that are compatible with the balanced growth are also derived as a function of the initial level of debt-to-GDP ratio.

Suggested Citation

  • Atsumasa Kondo, 2016. "Sustainability of Public Debt in an AK Model with Complex Tax System," Discussion Papers CRR Discussion Paper Series A: General 21, Shiga University, Faculty of Economics,Center for Risk Research.
    • Handle: RePEc:shg:dpapea:21
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    File URL: https://www.econ.shiga-u.ac.jp/risk/DPA21kondo20160930.pdf
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    References listed on IDEAS

    as
    1. Atsumasa Kondo, 2016. "Interconnection of Fiscal Policies on Sustainability of Public Debt," Discussion Papers CRR Discussion Paper Series A: General 20, Shiga University, Faculty of Economics,Center for Risk Research.
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    13. Atsumasa Kondo, 2007. "On The Sustainability Of Government Borrowing In A Dynamic General Equilibrium," Pacific Economic Review, Wiley Blackwell, vol. 12(5), pages 565-576, December.
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    More about this item

    Keywords

    sustainability of public debt; tax system; balanced growth path; dynamic general equilibrium;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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