Book contents
- Frontmatter
- Contents of Volumes I, II, III
- List of contributors
- Editors' preface
- Kenneth J. Arrow
- Contents
- PART I SOCIAL CHOICE
- PART II DECISION MAKING IN THE PUBLIC SECTOR
- 6 Testing for optimality in the absence of convexity
- 7 Toward a theory of planning
- 8 On the social risk premium
- 9 A problem of financial market equilibrium when the timing of tax payments is indeterminate
- 10 The shadow price of capital: implications for the opportunity cost of public programs, the burden of the debt, and tax reform
- Author index
9 - A problem of financial market equilibrium when the timing of tax payments is indeterminate
Published online by Cambridge University Press: 05 November 2011
- Frontmatter
- Contents of Volumes I, II, III
- List of contributors
- Editors' preface
- Kenneth J. Arrow
- Contents
- PART I SOCIAL CHOICE
- PART II DECISION MAKING IN THE PUBLIC SECTOR
- 6 Testing for optimality in the absence of convexity
- 7 Toward a theory of planning
- 8 On the social risk premium
- 9 A problem of financial market equilibrium when the timing of tax payments is indeterminate
- 10 The shadow price of capital: implications for the opportunity cost of public programs, the burden of the debt, and tax reform
- Author index
Summary
Introduction
This chapter concerns an aspect of the question: When do government deficits matter? It takes as a starting point previous work (1981) showing how endogenously generated deficits might have no real effect, a result obtained under an assumption of perfect substitutability between government and private debt. The extension to a world of risky debt where the latter no longer holds turns out to involve new elements that may be of some general interest. In particular, the conditions for neutrality seem less likely to be fulfilled in a practical context.
The underlying idea is that it should not matter when taxes are paid provided there is an appropriate compensating interest element in the postponed liability. This notion conflicts with the assumption often employed that it is the government's cash flow balance that counts, even though current deficits may be offset by correspondingly larger liability for future tax payments, and surpluses may reflect drawing down liabilities for future taxes. This issue arises especially strongly in the context of analysis of proposals for consumption-type taxes, where there is a choice between a literal consumption tax and a tax on wage and transfer receipts. Typically, the two approaches generate the same liabilities in a present-value sense but very different cash flows. In some systems [for example, the Cash Flow Tax analyzed in Bradford et al. (1984)], the taxpayer has wide latitude to choose between the approaches.
- Type
- Chapter
- Information
- Essays in Honor of Kenneth J. Arrow , pp. 177 - 188Publisher: Cambridge University PressPrint publication year: 1986