Ricardian equivalence refers to the situation where taxpayers equate:
A) higher budget deficits today with higher levels of government spending.
B) higher government spending with lower marginal tax rates.
C) budget deficits today with higher interest rates.
D) lower taxes today with higher taxes in the future.

Question

Quizplus · Accepted Answer

Ricardian equivalence refers to the idea that taxpayers anticipate future tax increases to repay any increase in government spending or budget deficits today. Therefore, they adjust their current consumption and savings decisions in anticipation of higher taxes in the future, essentially making current tax cuts ineffective in stimulating the economy. This means that taxpayers view lower taxes today as merely temporary and save the extra money instead of spending it, believing that future higher taxes will offset any current benefits from the tax cuts. Therefore, the correct answer is D – lower taxes today with higher taxes in the future.

Ricardian Equivalence Refers to the Situation Where Taxpayers Equate