Thursday, August 04, 2005

Normative Ricardian Equivalence?

We have this from PGL at Angry Bear:
Let’s repeat for the millionth time – Bush has shifted taxes not cut them. Of course, the GOP loves to talk about “right size in government”, which seems to mean increase spending so the kids have to pay more taxes down the line.
Normally, Ricardian equivalence is posited as a descriptive idea. That is, everybody realizes that tax cuts now mean tax raises later, so they just save the tax cut. Therefore tax cuts have no effect on consumption. Of course, this is obviously wrong. So now what we do is try to convince people to think like that!

But why stop at advocating this idea as purely political? It would be fairly easy to nullify the Bush tax cuts if it were possible to convince people to save the money they got from the tax cut. Then they'd just pay it back when taxes went back up or give it to their kids to do so if it took that long. In fact, you could argue that people would be better off if they didn't spend their tax cut (it works if you think people would really prefer to smooth their income but, irrationally, they don't.)

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