Political Economy of Taxation, Debt Ceilings, and Growth

This study presents voting on policies including labor and capital income taxes and public debt in an overlapping-generations model with physical and human capital accumulation, and it then analyzes the effects of a debt ceiling on a government's policy formation and its impact on growth and welfare. The debt ceiling induces the government to shift the tax burdens from the older to younger generations, but stimulates physical capital accumulation and may increase public education expenditure, resulting in a higher growth rate. Alternatively, the debt ceiling is measured from the viewpoint of a benevolent planner; lowering the debt ceiling (i.e., tightening fiscal discipline) makes it possible for the government to approach the planner's allocation in an aging society