There is No Natural Debt Limit with Consumption Tax

Author Name KOBAYASHI Keiichiro  (Faculty Fellow, RIETI)
Creation Date/NO. July 2014 14-E-043
Research Project Macroeconomic Analysis on the Public Debt, Deflation, and Other Related Issues
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In this paper, I demonstrate that the Laffer curve for a consumption tax increases monotonically and unboundedly in a closed economy in which the supply of one factor of production is fixed. Therefore, in this economy, an arbitrary amount of government debt can be made sustainable by choosing an appropriate tax rate. Tax revenue unboundedly increases due to a matter of accounting—tax revenue is transferred back to households as the redemption of government debt, which is used for the consumption, and is then taxed again.