Explain why many economists are skeptical about whether Ricardian equivalence describes the behavior of households in the economy

Question

What will be an ideal response?

Answer 1

Ricardian equivalence assumes that households are forward looking in an extreme sense. If taxes are cut today and not raised for several years, households may not realize that their taxes will increase, so they may think that their lifetime disposable income has increased, and therefore increase consumption expenditures.
For Ricardian equivalence to hold, financial markets must work well enough so that households can borrow or save as much as they would like at current interest rates. If the government announced a tax increase this year and an equal tax cut next year, households must borrow in financial markets to compensate for the drop in disposable income this year, yet some may not be able to borrow enough to keep consumption constant.
Changes in taxes may affect household behavior. Since income tax rates affect the decision of households to supply labor, a tax increase today will reduce the quantity of labor supplied and reduce real GDP today. Taxes on capital income will affect the accumulation of capital stock, which will also affect real GDP. So, tax changes that affect the behavior of households may affect real GDP and consumption expenditures.