Debt in the U.S. Economy

Kaiji Chenz and Ayse Imrohoroglu
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Kaiji Chenz: Department of Economics, Emory University, Atlanta

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: 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.

Keywords: Tax distortion; Dynamic Laffer Curve; Debt-to-GNP Ratio. (search for similar items in EconPapers)
JEL-codes: E27 E62 H68 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Related works:
Journal Article: Debt in the US economy (2017)
Working Paper: Debt and the U.S. Economy (2012)
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