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Do tax cuts increase consumption? An experimental test of Ricardian Equivalence
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Do tax cuts increase consumption? An experimental test of Ricardian Equivalence

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  • Meissner, Thomas
  • Rostam-Afschar, Davud

Abstract

This paper tests whether the Ricardian Equivalence proposition holds in a life cycle consumption laboratory experiment. This proposition is a fundamental assumption underlying numerous studies on intertemporal choice and has important implications for tax policy. Using nonparametric and panel data methods, we find that the Ricardian Equivalence proposition does not hold in general. Our results suggest that taxation has a significant and strong impact on consumption choice. Over the life cycle, a tax relief increases consumption on average by about 22% of the tax rebate. A tax increase causes consumption to decrease by about 30% of the tax increase. These results are robust with respect to variations in the difficulty to smooth consumption. In our experiment, we find the behavior of about 62% of our subjects to be inconsistent with the Ricardian proposition. Our results show dynamic effects; taxation inuences consumption beyond the current period.

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  • Meissner, Thomas & Rostam-Afschar, Davud, 2014. "Do tax cuts increase consumption? An experimental test of Ricardian Equivalence," Discussion Papers 2014/16, Free University Berlin, School of Business & Economics.
    • Handle: RePEc:zbw:fubsbe:201416
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    2. Orland, Andreas & Rostam-Afschar, Davud, 2021. "Flexible work arrangements and precautionary behavior: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 442-481.
    3. Petr Frejlich & Helena Chytilová & Vojtěch Kotrba & Pavel Kotrba, 2023. "Experimentální ověření platnosti Barrovy-Ricardovy ekvivalence [Experimental Verification of Barro-Ricardo Equivalence Theorem]," Politická ekonomie, Prague University of Economics and Business, vol. 2023(4), pages 366-389.
    4. Thomas Meissner, 2016. "Intertemporal consumption and debt aversion: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 281-298, June.
    5. Meissner, Thomas, 2013. "Intertemporal consumption and debt aversion: An experimental study," SFB 649 Discussion Papers 2013-045, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Atdhetar Gara & Vese Qehaja-Keka & Abdylmenaf Bexheti & Arber Hoti & Driton Qehaja, 2024. "Impact of Fiscal Policy on Economic Growth: Evidence from South East European Countries," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 65-77.
    7. Duffy, John & Li, Yue, 2019. "Lifecycle consumption under different income profiles: Evidence and theory," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 74-94.
    8. Geiger, Martin & Luhan, Wolfgang J. & Scharler, Johann, 2016. "When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 1-20.
    9. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    10. Bachmann, Kremena & Lot, Andre & Xu, Xiaogeng & Hens, Thorsten, 2023. "Experimental Research on Retirement Decision-Making: Evidence from Replications," Journal of Banking & Finance, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    Ricardian Equivalence; Taxation; Life Cycle; Consumption; Laboratory Experiment;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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