A Generalisation and Simplification of the Cambridge Theorem with Budget Deficits.

Professor Luigi Pasinetti's 1989 paper on the Cambridge Theorem when the government operates steady-state budget deficits is generalized to model interest payments on public debt and on indirect tax on capital expenditure. It is shown that the Cambridge Theorem still applies in the two special cases considered by Pasinetti (an inflation tax or Ricardian equivalence can be applied), but also more generally when neither are present. Further, the analysis is simplified and made more transparent when the capital expenditure tax rate equals the indirect tax rate on consumption. In all cases, the burden of taxation falls on wages. Copyright 1991 by Oxford University Press.