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

Atsumasa Kondo ()
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Atsumasa Kondo: Faculty of Economics, Shiga University

No 21, Discussion Papers CRR Discussion Paper Series A: General from Shiga University, Faculty of Economics,Center for Risk Research

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.

Keywords: sustainability of public debt; tax system; balanced growth path; dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: E62 H6 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2016-09
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:shg:dpapea:21

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