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Can Budget Deficits Improve Welfare in both the Short Run and Long Run?

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  • KIM‐HENG TAN

Abstract

In the Neoclassical model of public debt, consumers have finite life spans, and budget deficits shift taxes to future generations, reducing savings, raising the interest rate and reducing the capital stock. In such a setting, budget deficits decrease welfare in the long run. This result also holds in an otherwise Ricardian model subject to distortionary taxation. This paper shows that budget deficits are welfare‐improving in the long run if a capital income tax of appropriate magnitude is imposed given a high interest‐rate environment, and this welfare improvement does not come at the expense of welfare reduction in the short run.

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  • Kim‐Heng Tan, 1997. "Can Budget Deficits Improve Welfare in both the Short Run and Long Run?," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 16-21, March.
    • Handle: RePEc:bla:ecorec:v:73:y:1997:i:220:p:16-21
    DOI: 10.1111/j.1475-4932.1997.tb00975.x
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    References listed on IDEAS

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    1. Kim-Heng Tan, 1995. "Strictly Pareto-improving bilateral reforms of public debts," Journal of Economics, Springer, vol. 62(2), pages 141-156, June.
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    4. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    5. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
    6. Harold Hotelling, 1932. "Edgeworth's Taxation Paradox and the Nature of Demand and Supply Functions," Journal of Political Economy, University of Chicago Press, vol. 40(5), pages 577-577.
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