Implementing an Optimal Tax Plan with Short Term Debt

Debortoli, Nunes, and Yared (2021) showed that when initial government debt is too high, Lucas and Stokey's (1983) debt management policy fails to implement a Ramsey plan for flat-rate taxes on labor. We show that preventing continuation Ramsey planners from resetting current-period tax rates and using short-term debt to finance accumulated primary deficits implements all Ramsey plans, including those with the high debt levels that trouble Lucas and Stokey's implementation. Our implementation equalizes Lagrange multipliers on distinct implementability constraints that face the Ramsey planner and the continuation planners, an essential indication of a successful implementation. We provide examples of our implementation under different initial debt structures and government spending patterns.