If you are very old and you receive a tax cut you may

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Unformatted text preview: l taxation. 2. Intergenerational redistribution. If you are very old and you receive a tax cut you may simply spend it since you do not expect to live in the future period. But if you care about your children you may not spend it but save it in the form of a bond and bequeath the bond to your children. This way the future generation is not burdened with the future increase in taxes. The future tax has in a way been prepaid. If this works then Ricardian equivalence will hold – but it all depends on how much people care about the future generation— Therefore Ricardian equivalence can fail in overlapping generations. 3. Real world taxation is not lump-sum. Income taxes are levied in most economies and if the income tax rate changes this changes the effective wage rate and thus institutes income and substitution effects. Therefore as the model stands, Ricardian equivalence will fail if taxes are not lump-sum. 4. Credit Constraints –THIS IS THE MOST IMPORTANT ONE FOR OUR COURSE. Suppose there are now two interest rates in the economy. One you receive when...
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This note was uploaded on 02/23/2014 for the course ECONOMICS 2152A taught by Professor Grekou during the Fall '10 term at UWO.

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