Distorting Taxes Can Invalidate Ricardian Equivalence Because

question 45

Multiple Choice

Distorting taxes can invalidate Ricardian equivalence because

• A)the distortions are only faced by the business sector.
• B)they are inferior to lump-sum taxes.
• C)they confuse consumers about the need for government to repay its debt.
• D)they are more popular, politically, than lump-sum taxes.
• E)alternative ways of collecting the same tax revenue produce different amounts of lost welfare.

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Definitions:

Disposable Income

Households' spendable and savable funds following income tax deductions.

Autonomous C

Spending by consumers that does not depend on current income levels, such as basic needs or contractual obligations.

Disposable Income

The budget households have for saving and spending activities after income taxes deductions.

Induced Consumption

Consumer spending that increases as income rises, and decreases when income falls, reflecting a direct relationship between income and consumption.