Uncertain Income, Uncertain Taxes and Ricardian Equivalence

Paul Hansen

Bulletin of Economic Research, 1996, vol. 48, issue 4, 317-28

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

Date: 1996
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