Ricardian Consumers with Keynesian Propensities

Robert Barsky, N. Gregory Mankiw and Stephen Zeldes

American Economic Review, 1986, vol. 76, issue 4, 676-91

Abstract: This paper examines Ricardian equivalence in a world in which taxes arenot lump sum, but are levied on risky labor income. It shows that themarginal propensity to consume out of a tax cut, coupled with a futureincome tax increase, can be substantial under plausible assumptions. Indeed, the MPC out of a tax cut can be closer to the Keynesian valuethat ignores the future tax liabilities than to the Ricardian value that treats future taxes as if they were lump sum. Copyright 1986 by American Economic Association.

Date: 1986
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