The Failure of Ricardian Equivalence Under Progressive Wealth Taxation

Andrew B. Abel

NBER Working Paper No. 1983 (Also Reprint No. r0862)
Issued in May 1987
NBER Program(s):   PE

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. These

departures from Ricerdian Equivalence hold more generally under any nonlinear tax on saving, wealth or income accruing to wealth.

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Published: Abel, Andrew B. "The Failure of Ricardian Equivalence Under Progressive Wealth Taxation." Journal of Public Economics, Vol. 30, No. 1, (June 1986), pp . 117-128.

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