The Failure of Ricardian Equivalence Under Progressive Wealth Taxation

17 Pages Posted: 9 Jul 2004

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: July 1986

Abstract

Although the Ricardian Equivalence Theorem holds under a linear estate tax schedule, it fails to hold under a nonlinear estate tax schedule. In a representative consumer economy, a temporary lump-sum tax increase reduces contemporaneous consumption. If different consumers face different marginal estate tax rates because they leave bequests of different sizes, a lump-sum tax increase redistributes resources from consumers in low marginal estate tax brackets to consumers in high marginal estate tax brackets; aggregate consumption mey rise, fall, or remain unchanged. Thesedepartures from Ricerdian Equivalence hold more generally under any nonlinear tax on saving, wealth or income accruing to wealth.

Suggested Citation

Abel, Andrew B., The Failure of Ricardian Equivalence Under Progressive Wealth Taxation (July 1986). NBER Working Paper No. w1983. Available at SSRN: https://ssrn.com/abstract=344789

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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HOME PAGE: http://finance.wharton.upenn.edu/~abel/

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