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The failure of Ricardian equivalence under progressive wealth taxation

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  • Abel, Andrew B.

Abstract

Although the Ricardian Equivalence Theorem holds under a linear estate tax schedule, it fails to hold under a nonlinear estate tax schedule. In a representative consumer economy, a temporary lump-sum tax increase reduces contemporaneous consumption. If different consumers face different marginal estate tax rates because they leave bequests of different sizes, a lump-sum tax increase redistributes resources from consumers in low marginal estate tax brackets to consumers in high marginal estate tax brackets; aggregate consumption mey rise, fall, or remain unchanged. These departures from Ricerdian Equivalence hold more generally under any nonlinear tax on saving, wealth or income accruing to wealth.
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Suggested Citation

  • Abel, Andrew B., 1986. "The failure of Ricardian equivalence under progressive wealth taxation," Journal of Public Economics, Elsevier, vol. 30(1), pages 117-128, June.
  • Handle: RePEc:eee:pubeco:v:30:y:1986:i:1:p:117-128
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Burbidge, John B, 1983. "Government Debt in an Overlapping-Generations Model with Bequests and Gifts," American Economic Review, American Economic Association, vol. 73(1), pages 222-227, March.
    3. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-691, September.
    4. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324, Elsevier.
    5. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-338, April.
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    Cited by:

    1. Bilgili, Faik, 1998. "The effects of tax-cuts and government bonds on aggregate demand," MPRA Paper 75606, University Library of Munich, Germany.
    2. repec:wsi:wsbook:6875 is not listed on IDEAS
    3. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    4. Artidiatun Adji & James Alm & Paul J. Ferraro, 2009. "Experimental tests of Ricardian equivalence with distortionary versus nondistortionary taxes," Economics Bulletin, AccessEcon, vol. 29(4), pages 2556-2572.
    5. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.

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