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Mause I 277
Equivalence Theorem/government debt/Ricardo/Barro: Thesis: the financing of public expenditure via taxes or via government debt is equivalent. However, this requires a number of restrictive assumptions. The theorem goes back to Ricardo, but was only brought into its present form by Barro. (1)
N.B.: The question is whether additional expenditure makes sense in consideration of the need for private cutting consumption to finance it, but not in what way it is financed.
Reason: If government debt rises, private households will anticipate future tax increases and adjust their consumption patterns accordingly.
VsEquivalence Theorem: the empirical relevance of these questions can be questioned.
For example, there could be altruism between the generations: Parents plan with a basically infinite time horizon.
Another problem: it is also assumed that the path of expenditure policy is independent of the financial instrument used. This is only plausible if intergenerational altruism works and voters are perfectly informed.
Behavioral Economics/BuchananVsRicardo/BuchananVsBarro/BuchananVsEquivalence theorem: if government debt is perceived less strongly than taxes, debt-financed higher spending may be politically enforceable. Then Ricardo's equivalence collapses. (2)
This problem also exists when the capital markets are not perfect, allowing households to easily shift consumption between the present and the future, even without public debt instruments.
VsBarro: another problem: distorting taxes: If you move away from the first best tax system, it may well play a role for the welfare of individuals whether the state is in debt. Hereto:
Solution/Barro: subsequently introduced the argument of tax smoothing into the discussion. (3) In this case, it makes sense to compensate for fluctuations in tax revenue by increasing and reducing government debt, but to keep tax rates relatively constant.
BarroVsKeynesianism: The reason for this is not an economic policy countermeasure for Keynesian motives, but the fact that welfare losses caused by distorting taxes increase disproportionately with tax rates. For further problems: see Growth/Diamond.


1. Robert J. Barro. 1974. Are government bonds net wealth? Journal of Political Economy 82 (6): 1095 – 1117.
2. James M. Buchanan & Richard E. Wagner. Democracy in deficit. The political legacy of Lord Keynes. New York 1977.
3. Robert J. Barro. 1979. On the determination of the public debt. Journal of Political Economy 87 (5): 940– 971.


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Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

EconRic I
David Ricardo
On the principles of political economy and taxation Indianapolis 2004

Mause I
Karsten Mause
Christian Müller
Klaus Schubert,
Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018


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Ed. Martin Schulz, access date 2019-05-20
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