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Uncertain Income, Uncertain Taxes and Ricardian Equivalence

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  • Hansen, Paul

Abstract

L. K. C. Chan (1983) and R. B. Barsky et al. (1986) have demonstrated that a tax cut financed by bonds to be repaid from proportional income taxes on uncertain future income, by reducing the latter's riskiness, stimulates current consumption--Ricardian equivalence does not hold. However, their two-period models exclude the possibility that future taxes are uncertain. In this paper a three-period model is developed that, by allowing the government two periods in which to collect taxes, introduces ex ante tax rate uncertainty. This renders the result concerning Ricardian equivalence ambiguous. By comparison, taxes levied as lump sums and via a 'lottery' respectively produce the 'usual' effects (zero and negative) on consumption. Copyright 1996 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Suggested Citation

  • Hansen, Paul, 1996. "Uncertain Income, Uncertain Taxes and Ricardian Equivalence," Bulletin of Economic Research, Wiley Blackwell, vol. 48(4), pages 317-328, October.
    • Handle: RePEc:bla:buecrs:v:48:y:1996:i:4:p:317-28
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    Cited by:

    1. Saima Sarwar, 2015. "Revisiting Ricardian Equivalence Hypothesis (REH) For Pakistan Using Money Demand Function Approach," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 4(3), pages 154-166.
    2. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.

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