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Experimental tests of Ricardian equivalence with distortionary versus nondistortionary taxes

  • Artidiatun Adji

    ()

    (Universitas Gadjah Mada, Yogyakarta, Indonesia)

  • James Alm

    ()

    (Georgia State University)

  • Paul J. Ferraro

    ()

    (Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA USA)

Previous experimental work has examined the effects of relaxing some assumptions upon which Ricardian equivalence is based. Notably, however, the impact of distortionary taxation on Ricardian equivalence has not been investigated. This paper tests the effects of distortionary versus nondistortionary taxation. Distortionary taxes are introduced in some settings by levying a “tax” on savings, so that one unit of savings does not lead to one unit of future consumption. We find that, in the presence of nondistorting (e.g., lumpsum) taxes, there is strong evidence that subjects behave according to the predictions of Ricardian equivalence; that is, an increase in debt on one generation leads to an increase in bequests to the future generation by an equal amount. However, in the presence of distorting taxes, consumption is not equalized across periods, and the predicted Ricardian equality between the change in bequests and the change in debt is not attained.

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File URL: http://www.accessecon.com/pubs/EB/2009/Volume29/EB-09-V29-I4-P9.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 4 ()
Pages: 2556-2572

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Handle: RePEc:ebl:ecbull:eb-09-00448
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