Taxing deficits to restrain government spending and foster capital accumulation

Nikolai Stähler ()

No 2007,26, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: In a dynamic model of fiscal policy, social polarization provokes a deficit bias. Policy advisors have recently proposed that governments running a deficit should be forced to generate additional tax revenue. We show that this deficit taxation reduces the deficit bias as it internalizes the externality different lobby groups impose on others. The mechanism described here is not due to the political risk of being elected out of office because the private sector dislikes taxation. Lower government spending and the resulting reduced deficit bias augment capital accumulation.

Keywords: fiscal rules; deficit taxation; polarization; capital accumulation (search for similar items in EconPapers)
JEL-codes: E62 H61 H62 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: Written 2007
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