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208-2011-L10 - Econ208 MarekKapicka Lecture10...

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Econ 208 Marek Kapicka Lecture 10 Ricardian Equivalence Ramsey Taxation
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Midterm n Average: 149/200 n Max: 190
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Failure of Ricardian Equivalence   1. If people are heterogeneous, they  might not be affected equally n Some people may receive larger tax cuts  than others and their lifetime wealth may  change n That is, there is a redistribution of wealth  across people
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Failure of Ricardian Equivalence 2. Debt may not be repaid during the  lifetimes of the people who received  tax cuts n There is a redistribution of wealth across  generations n Example: Social Security
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Failure of Ricardian Equivalence 3. Credit markets are not perfect n People may face borrowing limits. In such  case, a tax cut will not be saved n People may face higher interest rate than  government. In such case, a tax cut will  increase present value of their resources  and increase consumption
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Failure of Ricardian Equivalence 4. Taxes are not lump sum n If taxes cause distortions, then timing of  taxes does matter n A government may want to spread the  distortions across all periods
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Example of RI: George Bush, 1992 n George Bush, 1992: change in tax  withholding n
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