Optimal Public Debt with Redistribution (JMP)

Abstract: Fiscal policy choices affect both the degree of progressivity of the tax system and the amount of public debt in circulation. What is the connection between these two elements? In this paper, I consider a benevolent optimizing government and explore how both progressivity and indebtedness depend on the planner’s preferences for redistribution. Somewhat surprisingly, I show that differences in preferences for redistribution lead to a negative correlation between progressivity and indebtedness, as a planner that cares more for redistribution favors lower levels of public debt.