"Ricardian Consumers with Keynesian Propensities"
American Economic Review,
Volume: 76 | Issue: 4 | Pages: 676-91
Publication type: Journal article
Research Archive Topic: Business Economics and Public Policy
This paper examines Ricardian equivalence in a world in which taxes are not lump sum, but are levied on risky labor income. It shows that the marginal propensity to consume out of a tax cut, coupled with a future income tax increase, can be substantial under plausible assumptions. Indeed, the MPC out of a tax cut can be closer to the Keynesian value that ignores the future tax liabilities than to the Ricardian value that treats future taxes as if they were lump sum.
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