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Debt in the U.S. Economy

  • Kaiji Chenz

    (Department of Economics, Emory University, Atlanta)

  • Ayse Imrohoroglu

    ()

    (Department of Finance and Business Economics, Marshall School of Business, University of Southern California)

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    In 2011, the publicly held debt-to-GDP ratio in the United States reached 68% and is expected to continue rising. Many proposals to curb the government deficit and the resulting debt are being discussed. In this paper, we use the standard neoclassical growth model to examine the future path of output, budget deficits, and debt in the U.S. economy under different tax policies. While this framework is relatively simple, it incorporates the general equilibrium effects of tax policy, which are often missing from the Congressional Budget Office projections. Our results show that debt-to-GNP ratios above 100% are likely to continue into the future and that even small labor supply elasticities have a significant impact on these projections. We also find that labor income tax rates higher than 40% are needed for the deficit-to-GNP ratio to return to its historical level in the long run. Such high tax rates, however, result in about 10% lower per capita GNP and large welfare costs at the steady state compared to the historical tax rates.

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1401.pdf
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    Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1401.

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    Length: 44 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:koc:wpaper:1401
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    1. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
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    11. Selo Imrohoroglu & Kaiji Chen & Ayse Imrohoroglu, 2005. "Japanese Saving Rate," 2005 Meeting Papers 747, Society for Economic Dynamics.
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    13. Alan J. Auerbach, 2005. "Dynamic Scoring: An Introduction to the Issues," American Economic Review, American Economic Association, vol. 95(2), pages 421-425, May.
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    15. Joines, Douglas H, 1981. "Estimates of Effective Marginal Tax Rates on Factor Incomes," The Journal of Business, University of Chicago Press, vol. 54(2), pages 191-226, April.
    16. Chen, Kaiji & Imrohoroglu, Ayse & Imrohoroglu, Selahattin, 2009. "A quantitative assessment of the decline in the U.S. current account," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1135-1147, November.
    17. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
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