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.

Question

Quizplus · Accepted Answer

Ricardian equivalence holds only when alternative ways of collecting the same tax revenue produce equivalent distortions. If taxes are distorted or inefficiently collected, then individuals may not respond to changes in taxes in the same way, and Ricardian equivalence may not hold. Therefore, the fact that alternative ways of collecting the same tax revenue produce different amounts of lost welfare can invalidate Ricardian equivalence.

Distorting Taxes Can Invalidate Ricardian Equivalence Because