These claims follow from the government’s intertemporal budget constraint and the household’s lifetime budget constraint, taken together. The government’s constraint tells us that a given amount (that is, a given discounted present value) of government spending implies a need for a given (discounted present value) amount of taxes. These taxes could come at all sorts of different times, with different implications for the deficit, but the total amount of taxes must be enough to pay for the total amount of spending. The household’s lifetime budget constraint tells us that the timing of taxes may be irrelevant to households as well: they should care about the total lifetime (after-tax) resources that they have available to them. The implications of the Ricardian perspective are not quite as stark if the increased deficit is due to increased government spending. Households should still realize that they have to pay for this spending with higher taxes at some future date. Lifetime household income will decrease, so consumption will decrease. However, consumption smoothing suggests that the decrease in consumption will be spread between the present and the future.
Don't use plagiarized sources. Get Your Custom Essay on
Discounted Present Value
Just from $13/Page