On the Irrelevance of Government Debt when Taxes are Distortionary
Abstract
We consider a government that can only raise funds by levying distortionary taxes. We allow the government to collect taxes in a given period that are based on incomes earned in previous periods. We show that once we do so, given any debt path, the government can adjust its tax policy so as to attain that debt path without affecting equilibrium allocations or prices.Suggested Citation
Marco Bassetto and Narayana Kocherlakota. "On the Irrelevance of Government Debt when Taxes are Distortionary" Journal of Monetary Economics 51.2 (2004): 299-304.