A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes

Alfred Haug

No 1607, Working Papers from University of Otago, Department of Economics

Abstract: This paper empirically tests the Ricardian equivalence hypothesis with a narrative measure of tax shocks. The present value, at the time of legislation, for tax increases motivated solely by concerns for improving the fiscal health of the government is used for the tests. These tax news represent a switch from debt to tax financing that should have no effects on the economy if Ricardian equivalence holds as a good approximation. Such a tax increase seems to have positive effects on real GDP in the post-1980:IV period. However, this is due to fiscal anticipation as many of the tax increases are implemented with substantial delays and distortionary taxes increase economic activity before taxes go up, which is caused by intertemporal substitution. Therefore, Ricardian equivalence is rejected.

Keywords: Ricardian equivalence hypothesis; narrative record; exogenous tax changes; government budget deficits. (search for similar items in EconPapers)
JEL-codes: C51 E62 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2016-07, Revised 2016-07
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.otago.ac.nz/economics/otago616214.pdf First version, 2016 (application/pdf)

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Working Paper: A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:otg:wpaper:1607

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