Four Budget Deficit Theories In One Model

Abstract

The analysis of many budget deficit theories is too demanding for undergraduate students. This paper illustrates governments' incentives to create budget deficits by means of a simple graphical model. It integrates four budget deficit theories: The theory of the state as Leviathan, two different strategic deficit theories, and the theory of tax competition. These theories are embedded into an illustrative example of political competition between a conservative party and a liberal party. The main pedagogical benefits of the model are its intuitive setup and its waiver of demanding analysis.