Channels, Spring 2018

Channels • 2018 • Volume 2 • Number 2 Page 27 Further, Buchanan argued that the differing time-streams of income faced by different individuals in the economy would lead to different perspectives on debt issue. A boxer with substantial current-period income that tapers off later in life will favor debt financing, but a medical student with little income now but substantial increases expected in the future will prefer tax financing. 71 Equivalency does not hold on this ground given that the time-stream of income is susceptible to individual responses to government policy. Buchanan argued that Ricardian equivalence mistakenly assumes only one type of taxpayer response to debt issue – saving more so as to be able to pay for the increased later tax liability. Nevertheless, on an individual level, assuming the usual income tax structure, taxpayers have an incentive to increase their income now and decrease their saving so as to pay less in the income tax later. 72 Therefore, Buchanan argued, the individual very well may seek to shift income from future to the present. Ricardian equivalence is not a clearly commanding explanation of human behavior, and, as such, stands or falls on the empirical evidence, which Buchanan already critiqued directly. Buchanan continued in this article by tying his arguments against Barro and Ricardian equivalence into his original public debt arguments. 73 He also critiques Barro’s claim to have developed a “theory of public debt” as “a contradiction in terms if debt and taxes were identical.” 74 Ultimately, Buchanan argued that equivalence fails because “Debt issue will tend to discourage savings and capital accumulation relative to that which would be generated under tax financing of the same public expenditures.” 75 As a result, Ricardian equivalence is untenable and acts as a cautionary tale to economists “prone to advance hypotheses prematurely.” 76 With his next critique, Buchanan and his co-author, Jennifer Roback, went even further, specifically addressing Barro’s 1974 paper and seeking to rebut his work specifically and not just Ricardian equivalence generally. It becomes clear in this paper that Buchanan saw the implicit threat in Barro’s work and did not simply dislike some of the underlying fundamentals on theoretical grounds. Buchanan writes “from this [Barro’s] conclusion, the inference has been drawn that public debt issue, as such, imposes no net costs. As we shall demonstrate, such an inference is incorrect”. 77 Coming in 1987, at over a decade’s distance from Barro’s original article, Buchanan’s continued focus on it likely demonstrated a shifting of opinion in the field in favor of Barro. Buchanan attempted to reverse this trend by arguing that Barro’s Neutrality Theorem goes further than Ricardian Equivalence regarding the former’s contention that debt issue has 71 Ibid, 396. 72 Ibid, 396. 73 “the old Keynesian distinction between internal and external debt is not relevant here (as all parties to the debate agree)”, Ibid, 398. 74 Ibid, 402. 75 Ibid, 406. 76 Ibid, 407. 77 James Buchanan, The Collected Works of James Buchanan, Vol. 14, Debt and Taxes, “The Incidence and Effects of Public Debt in the Absence of Fiscal Illusion,” (Liberty Fund Inc., Indianapolis: IN, 1999), 408.