The Barro-Ricardo equivalence proposition implies that tax cuts
A)always lead to a reduction in the budget deficit
B)always lead to the crowding out of investment spending
C)that lead to higher budget deficits do not stimulate consumption since people will save in anticipation of future tax increases
D)provide important incentives for economic growth
E)ease people's liquidity constraints so they consume more

Question

Quizplus · Accepted Answer

The Barro-Ricardo equivalence proposition argues that tax cuts that lead to higher budget deficits do not stimulate consumption as people anticipate future tax increases to repay the deficit. Therefore, the tax cut does not provide an economic stimulus, and the deficit persists or worsens.

The Barro-Ricardo Equivalence Proposition Implies That Tax Cuts