Are Future Taxes Anticipated by Consumers?: Comment

This paper explores the effect of including the federal government deficit among the variables used to explain the level of private consumption. The addition of the federal deficit to the consumption function can help to resolve an outstanding macroeconomic theory and policy dispute; the question of how fiscal policy affects income, if indeed it does affect income. Some recent studies report that changes in taxation have essentially no influence on income.l Changes in the government deficit crowd out private expendltures as effectively as does taxation, according to these studies. One method of testing this result is to examine the impact of government expenditures and taxes on the components of income. In this paper, I present and test the hypothesis that consumers anticipate the future taxes implied by present deficits and that consumption expenditures, given disposable income, vary in such a way as to offset substantially the effect of government deficits. The method that is used includes, in regression equations explaining consumption, a variable representing the current deficit. There has been so-me concern expressed recently over the high level of the savings ratio. Analysts have been surprised by this, and many ad hoc explanations have been suggested. The hypothesis advanced here provides an explanation grounded in a fundamental principle of economic analysis the assumption that consumers act rationally which explains