The Ricardian Nonequivalence Theorem

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Abstract
The Ricardian equivalence theorem states that government bonds and lump-sum taxes are equivalent means to finance government spending. Thus, a lump-sum tax cut financed by the issuance of government bonds would not affect consumption. Consumers could hold the newly issued bonds, and use them to pay the higher taxes when the government increases taxes to repay the principal and interest on the bonds. Intergenerational altruism implies that Ricardian equivalence holds even if the recipients of a tax cut die before future taxes are increased to fully repay the bonds. This article explores situations where Ricardian equivalence does or does not hold. Back to top

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