Abstract

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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Citation

Barsky, Robert, N. Mankiw, and Stephen Zeldes. "Ricardian Consumers with Keynesian Propensities." American Economic Review 76, no. 4 (September 1986): 676-91.

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