On the Redistributive Property of Budget Deficits

This paper argues that budget deficits can be used strategically by the government to improve its chance of reelection. Under progressive wealth taxation, Ricardian equivalence fails if individuals have different levels of wealth because a budget deficit redistributes resources from individuals in high marginal wealth tax brackets to those in low marginal wealth tax brackets. A conservative government, who represents the interests of wealthy individuals and needs to swing the median voter to be reelected, runs a budget deficit so as to drive the median voter's wealth into a high marginal wealth tax bracket and make him better off under less progressive taxation. Vice versa, a liberal government, who represents the interests of individuals with low wealth and needs to swing the median voter to be reelected, runs a budget surplus so as to drive the median's voter wealth into a low marginal tax bracket and make him better off under a more progressive taxation. This model predicts that conservative governments choose less progressive wealth taxation than liberal governments and, when electoral competition is stiff, conservative governments lower taxes and run budget deficits whereas liberal government raise taxes and run budget surpluses