Your Patriotic Duty - Bear the Tax Burden

To avoid anyone reading this from nodding off to sleep, let me very quickly get the point across and allow you to read the whole text below for further clarification.

News Headline:Ben Bernake

Ben Bernake, head of the U.S. Fed Bank, explains when government spending programs are wasteful by adding little to national wealth or productivity, then taxpayers view this increased spending as simply increasing the debt burden they must bear and they reduce their own expenditure with the net effect that government fiscal actions will be reduced.

News Flash:

The Principle of Ricardian equivelence - This is doublespeak repeating Obama fiscal mantra - "Spend more and more!"  Obama assumes a "net zero tax cost" when he can tax and then gain net savings back from his federal spending programs. As Obama follows Ben Bernanke's logic, the taxpayers will not suffer from more taxes, they simply will tighten their belts further and spend less to live - and that's how the American Standard of Living is redistributed and beaten down lower on the backs of all taxpayers.

Realistically, the practical effect of Ricardian equivalence on spending/saving in the US is probably minimal anyway because the top 20 percent of Americans earn 53.4 percent of the total U.S. income, but pay 67.2 percent of total income tax. The 47% who pay no tax (and anticipate continuing to pay no tax) aren't worried about any future tax liability, and they are the ones with the highest marginal propensity to consume and spend. Since prevailing tax rules contain future uncertainties about additional taxes, it may be more likely to suspect reactions to curtail some spending under this threat.

Bernanke speech - Japan Society of Monetary Economics, May 31, 2003:

"In economics textbooks, the idea that people will save rather than spend tax cuts because of the implied increase in future tax obligations is known as the principle of Ricardian equivalence. In general, the evidence for Ricardian equivalence in real economies is mixed, but it seems most likely to apply in a situation like that prevailing today in Japan, in which people have been made highly aware of the potential burden of the national debt."

The principle of Ricardian equivalence does not apply exactly to increases in government purchases (for example, road building) but it may apply there approximately. If, for example, people think that government spending projects are generally wasteful and add little to national wealth or productivity, then taxpayers may view increased government spending as simply increasing the burden of the government debt that they must bear. If, as a result, they react to increases in government spending by reducing their own expenditure, the net stimulative effect of fiscal actions will be reduced.