TAX DISCOUNTING VS. CROWDING OUT

Stephen Mathis and Hamid Bastin

Contemporary Economic Policy, 1992, vol. 10, issue 2, 54-62

Abstract: The “crowding out” effect of debt‐financed government spending on the private sector consumption‐saving decision and on private investment behavior has been a controversial subject for several years. Do increases in debt‐financed government spending stimulate private consumption and saving in the short run, as well as private consumption in subsequent periods? Or does the realization that future taxes must be raised to finance repayment of the debt result in a lack of stimulus for consumption as well as no detrimental impact on subsequent private saving? This article empirically tests for the presence and/or magnitude of tax discounting and crowding out, carefully distinguishing between the two, and decomposes government debt instruments according to their maturities in order to determine impact due to a reorientation of debt structure. The results do not support the existence of tax discounting, suggesting instead that government deficits do stimulate current consumption.

Date: 1992
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