The welfare effects of the Reagan deficits: A portfolio choice approach

I analyze the incidence of U. S. fiscal policy using a two-period, general equilibrium portfolio choice model with imperfect capital markets. Using data from the 1983-89 Panel Survey of Consumer Finances, I divide the population into three groups according to their 1982 portfolio choices and calculate average tax rates for each class of asset holders. Compared to the counterfactual of constant tax rates, the high deficits of the 1980s harmed the welfare of two large minorities concentrated in both the higher- and lower-income groups, but benefited the majority whose income fell largely in the middle of the income distribution.