208-2011-L10

208-2011-L10 - Econ 208 Marek Kapicka Lecture 10 Ricardian...

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Unformatted text preview: Econ 208 Marek Kapicka Lecture 10 Ricardian Equivalence Ramsey Taxation Midterm n Average: 149/200 n Max: 190 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 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 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 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 Example of RI: George Bush, 1992 n George Bush, 1992: change in tax withholding n Taxes were deferred until April 1993...
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208-2011-L10 - Econ 208 Marek Kapicka Lecture 10 Ricardian...

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