Thomas Moller is an economist for Econometrics Associates. Moller’s supervisor asks him to propose how to reduce the fiscal imbalance. Moller contends that the fiscal imbalance can be reduced by raising income taxes. Moller’s colleague, Melissa Stephens, contends that the fiscal imbalance can be reduced by cutting government promised benefits.
Regarding their statements, Moller and Stephens are:
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The fiscal imbalance, defined as the difference in present values between the government’s promised benefits and revenues, can be reduced by increasing taxes, cutting promised benefits, or cutting other government spending. Both Moller and Stephens are correct.
Which of the following most accurately describes the generational effects of fiscal policy?
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Generational effects of fiscal policy refer to the burden of government deficits, which must be corrected by future increases in taxes or decreases in government spending. Studies show that in the U.S., more than half of the burden of the fiscal imbalance will fall on future generations.
In the context of fiscal policy, a generational imbalance exists when:
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A generational imbalance is said to exist when the present value of government obligations owed to the current generation is greater than the lifetime tax burden of the current generation—i.e., if benefits have been promised to the current generation that will have to be paid from taxes levied on future generations.
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