Sustainability of Public Debt in an AK Model with Complex Tax SystemSustainability of Public Debt in an AK Model with Complex Tax System Sustainability of Public Debt in an AK Model with Complex Tax System
20 , 2016-09 , Center for Risk Research (CRR), Shiga University
This paper theoretically investigates the role of the tax system in sustainingthe public debt. The paper explicitly derives the critical level of the publicdebt-to-GDP ratio that is compatible with a balanced growth path. If theratio exceeds this critical level at time 0, then it diverges to +∞ as timepasses. Analyzing a situation where the government marginally increases theconsumption tax rate, the paper reveals the extent to which the governmentcan then cut the income tax rate while maintaining the sustainability ofpublic debt. Tax rates that are compatible with the balanced growth arealso derived as a function of the initial level of debt-to-GDP ratio.