Ricardian Equivalence
What is Ricardian Equivalence?
The idea that debt-financed tax cuts may not boost spending because people save to pay future taxes.
Understanding Ricardian Equivalence
Named after David Ricardo and formalized by Robert Barro in 1974, the theory says that if people expect today's borrowing to mean higher taxes later, they will save a tax cut rather than spend it.
Evidence suggests it holds only partly: many households, especially those short of cash, spend a large share of tax cuts.