A Dynamic Theory of Public Spending, Taxation, and Debt

A Dynamic Theory of Public Spending, Taxation, and Debt

This paper presents a dynamic political economy theory of public spending, taxation, and debt. The theory builds on the well-known tax smoothing approach to fiscal policy pioneered by Robert Barro (1979). This approach predicts that governments will use budget surpluses and deficits as a buffer to prevent tax rates from changing too sharply. Thus, governments will run deficits in times of high ...

Public Debt, Taxation, and Capital Intensiveness*

In his “Principles of Political Economy and Taxation” [9], Ricardo cautioned that the deficit-financing of public expenditures sets back the growth of capital. The reference was to economies with rapid adjustment to “full-employment” equilibrium. While the Keynesians denied the rapid-equilibration assumption, the postwar reevaluation of monetary policy led to a modern restatement of Ricardo’s d...

Public debt, productive public spending and endogenous growth

We analyze effects of public debt in a basic endogenous growth model with productive public spending. We demonstrate that a discretionary policy violates the inter-temporal government budget constraint along a balanced growth path. A balanced government budget gives a unique saddle point stable growth path. With a rule based policy, two saddle point stable balanced growth paths can occur, depen...

Property taxation and local public spending: the renter effect

The point of departure for this study is the pervasive finding that, other things equal, local jurisdictions tend to spend more on local services the larger the fraction of renters among their residents. This paper seeks to determine the approximate magnitude of this “renter effect” by posing the question “How much smaller would local public budgets be if all residents were home-owners?” Making...

Taxation and Capital Spending