1. the public has to pay out in future taxes everything it receives in future interest.
2. the present value of the future taxes necessary to pay the future interest equals the tax cut.
3. the amount of real resources the government has to take from the private sector is unaffected.
4. all of the above are true.
Choose the correct option.
Option 4 is the correct one. Every year in the future the government will levy an amount of additional taxes just equal to the interest it has to pay on the new government debt. The public is thus receiving no net compensation in the aggregate from buying bonds rather than paying taxes. The present value of the future taxes is c/i where c is the annual interest payment and i is the rate of interest paid. This present value equals the magnitude of the tax cut. The government is making the same expenditure before and after the tax cut, so it must be taking exactly the same amount of resources away from the private sector whether it finances its expenditure by levying taxes or borrowing.