But if consumers decide to spend some of the extra disposable income they receive from a tax cut (because they are myopic about future tax payments, for example), then Ricardian equivalence will not hold a tax cut will lower national saving and raise aggregate demand. If these economists were right, then my earlier statement that budget deficits crowd out private investment would be wrong. When incomes are high, tax liabilities rise and. The extreme of this argument, known as Ricardian equivalence, holds that tax cuts will have no effect on national saving because changes in private saving will exactly offset changes in government saving. Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers. Recognizing that a tax cut today means higher taxes in the future, the argument goes, people will simply save the value of the tax cut they receive now in order to pay those future taxes.
Some economists have argued that this effect of fiscal policy on future taxes will lead consumers to change their saving.
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