Ricardian Equivalence is an economic theory stating that tax cuts financed by government borrowing do not stimulate the economy because rational households anticipate future tax increases to repay the debt, so they save the tax cut rather than spend it, causing private saving to rise exactly by the amount of the public deficit and leaving total demand unchanged.
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Why Tax Cuts Aren't Free Lunches — Ricardian Equivalence #ShortsAdded:
Every government promises tax cuts will boost the economy. More money in your pocket, more spending. But there's a theory that calls this an illusion, Ricardian equivalence. The idea, if the government cuts your taxes today and borrows to pay for it, rational citizens know they'll be taxed later to repay that debt. So they save the cut instead of spending it. Private saving rises to exactly offset the public deficit. Total demand unchanged. Tax cuts financed by debt aren't free lunches. They're loans and every loan has a repayment date.
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