The Failure of Ricardian Equivalence Under Progressive Wealth Taxation
17 Pages Posted: 9 Jul 2004
Date Written: July 1986
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.
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