Several analysis shows that with credible parameter of values, the extra burden of debt finance may outweigh the special advantage of avoiding a huge single tax change. As a result of this, financing a temporary rise in government spending clubbed with a sudden tax increase may be preferable in case of debt financing.
If a particular amount of government’s expenditure needs to be financed, there remains a clear division between taxes and government borrowing. After temporary increase in government spending, it was found that debt finance is optimal as the small increments in all future tax rates can considerably influence the government spending.
All future tax rates to finance interest payments involve a smaller excess burden than the single large tax rate that would be required to avoid an initial increase in national debt. The public finance theory related argument ignores the fact that excess burden of debt finance results when the initial capital stock remain smaller than the optimal.
The first portion of the present paper highlights the act and explains that debt-finance advantage of a small tax rate increase can be expressly balanced against the disadvantage due to the excess burden. The excess burden give rise to additional debt.
The second section of the public finance theory examines and provides a clear overview about the act that proper response to a permanent rise in government spending and it also shows that these spending can never be financed by a permanent rise in government debt. In addition to this, whenever the golden rule level of capital intensity remain in its optimal stage, increase in government spending should be matched by an equal rise in tax revenue.
Public finance theory focuses upon the fact that fiscal decentralization is a typical method to disclose the preferences of the contemporary and future generations for the cause of local public benefits. While the allocative branch of the government get benefits from fiscal decentralization, it is troublesome to obtain a distribution of incomes that differs from the outcome offered by the market. Public finance theory is of great value and it is universally accepted.
Last Updated on : 1st August 2013