The Welfare Costs of Deficit Finance

Ingemar Hansson and Charles Stuart

Economic Inquiry, 1987, vol. 25, issue 3, 479-96

Abstract: The authors analyze the welfare consequences of deficit finance in a gene ral equilibrium model fit to the U.S. economy. Current spending may b e financed with current and/or future distortionary taxes. The econom y is open to international capital flows. The welfare costs of financ ing marginal current spending are substantial and are sensitive to th e timing of the required taxes; postponing a tax on labor income is a dvantageous, but postponing a tax on asset income is not. Ricardian e quivalence poorly approximates the economy considered. Copyright 1987 by Oxford University Press.

Date: 1987
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