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

Question

Quizplus · Accepted Answer

Ricardian equivalence assumes that consumers anticipate future taxes, so if there is a distortion in the tax system, consumers may not accurately predict future taxes and therefore the assumption of Ricardian equivalence may not hold. Distorted taxes can also lead to different amounts of lost welfare, making it difficult to determine if the tax is equivalent to borrowing or not. Therefore, alternative ways of collecting the same tax revenue producing different amounts of lost welfare can invalidate Ricardian equivalence.

Distorting Taxes Can Invalidate Ricardian Equivalence Because