Abstract
This paper theoretically investigates the role of the tax system in sustaining the public debt. The paper explicitly derives the critical level of the public debt-to-GDP ratio that is compatible with a balanced growth path. If the ratio exceeds this critical level at time 0, then it diverges to + ∞ as time passes. Analyzing a situation where the government marginally increases the consumption tax rate, the paper reveals the extent to which the government can then cut the income tax rate while maintaining the sustainability of public debt. Tax rates that are compatible with the balanced growth are also derived as a function of the initial level of debt-to-GDP ratio.
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The symbol [0, ∞) stands for the set \(\left \{x \in \mathbb{R}: 0 \leq x < \infty \right \}\), where \(\mathbb{R}\) is the set of real numbers.
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This point was also pointed out by Kondo (2016) although he deals with the case of τ L = τ W .
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Acknowledgements
This research is financially supported by Ryosui Gakujutsu Foundation of Shiga University. The author would like to thank an anonymous referee for his/her helpful comments and advice.
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Kondo, A. (2017). Sustainability of Public Debt in an AK Model with Complex Tax System. In: Bökemeier, B., Greiner, A. (eds) Inequality and Finance in Macrodynamics. Dynamic Modeling and Econometrics in Economics and Finance, vol 23. Springer, Cham. https://doi.org/10.1007/978-3-319-54690-2_7
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DOI: https://doi.org/10.1007/978-3-319-54690-2_7
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