@techreport{c1ae3c262aab4f499c3d845eda2c3110,
title = "Capital Income Taxation and the Sustainability of Permanent Primary Deficits",
abstract = "If a government imposes a tax on capital income, it may, as a result, lower the private rate of return on capital below the growth rate of an economy, thereby giving rise to the possibility of running a permanent deficit. Since, however, the before-tax rate of return and not the after-tax rate of return is relevant for judging the dynamical efficiency of the economy, the possibility of a permanent deficit does not by itself imply a possibility for a Pareto-improving redistribution of income. To examine this issue {"}step by step{"}, we examine in general whether a government can run a deficit forever by rolling over its debt. Assuming the government to run a deficit in each period equal to a constant fraction of total output, we study several overlapping generations models, proceeding from endowment economies to neoclassical growth with a variable capital stock. We then introduce capital income taxation and show, for example, that permanent defcits are feasible in the case of a variable capital stock, provided the capital income tax is sufficiently high. We examine the welfare effects and discuss policy consequences.",
keywords = "income tax, deficit spending",
author = "H.F.H.V.S. Uhlig",
note = "Pagination: 38",
year = "1997",
language = "English",
volume = "1997-11",
series = "CentER Discussion Paper",
publisher = "Macroeconomics",
type = "WorkingPaper",
institution = "Macroeconomics",
}