Working Paper: NBER ID: w1400
Authors: Robert B. Barsky; Gregory Mankiw; Stephen P. Zeldes
Abstract: In this paper, we examine Ricardian equivalence of debt and tax finance in a world in which taxes are not lump-sum but are levied on risky labor income. First, we show that the marginal propensity to consume out of a tax cut, coupled with a future income tax increase, is positive under reasonable assumptions regarding preferences toward risk. Second, we document that the degree of income uncertainty facing the typical individual orfamily is large. Third, we show that, for plausible utility function parameters and distributions of future income, the MPC out of a tax cut is quantitatively large. Indeed, the MPC out of a tax cut, coupled with a future income tax increase, 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.
Keywords: Ricardian equivalence; Keynesian consumption; Income uncertainty; Tax policy
JEL Codes: E62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Cut (H29) | Marginal Propensity to Consume (MPC) (E21) |
| Future Income Tax Increase (H29) | Marginal Propensity to Consume (MPC) (E21) |
| Income Uncertainty (D89) | Consumption (E21) |
| Tax Cut (H29) | Consumption (E21) |
| Risk-Sharing Effect (D16) | Consumption (E21) |
| Precautionary Saving Behavior (D14) | Consumption (E21) |