Taxing deficits to restrain government spending and foster capital accumulation

In a dynamic model of fiscal policy, social polarization provokes a deficit bias. Policy advisors have recently proposed that governments running a deficitshould be forced to generate additional tax revenue. We show that this deficittaxation reduces the deficit bias as it internalizes the externality different lobby groups impose on others. The mechanism described here is not dueto the political risk of being elected out of office because the private sectordislikes taxation. Lower government spending and the resulting reduced deficit bias augment capital accumulation.