I’m constantly surprised by the naivety of opponents of Ricardian Equivalence. There are indeed many reasons why it may not hold. Some of these have already been mentioned in a previous post. I can add another to the list: hyperbolic discounting.
In addition, the difficulties associated with econometrically testing the proposition are almost intractable, mainly because of endogeneity considerations. What is certain is the near impossibility of isolating a particular policy episode and conclusively asserting that it does or does not amount to an expansionary fiscal contraction.
Nevertheless, none of the arguments against Ricardian Equivalence are sufficient to enable us to conclude that there is no tax discounting whatsoever. Such a view cannot provide “a valuable theoretical baseline”. The same remark applies to policy. Otherwise, the sort of spiralling sovereign debt burden, which Ireland is currently experiencing because of the bank bailout, would have no welfare implications because it would not affect private behaviour.