The Ricardian Approach to Budget Deficits 45 Uncertainty about Future T Some economists argue that the uncertainty about individuals' future taxes-( the complexity in estimating them-implies a high rate of discount in capitalizing these future liabilities(Martin Bailey, 1971, pp. 157-58; James Buchanan and Richard Wagner, 1977, pp. 17, 101, 130; Martin Feldstein, 1976, p. 335). In this case, a substitution of a budget deficit for current taxes raises net wealth because the present ralue of the higher expected future taxes falls short of the current tax cut. It the allows that budget deficits raise aggregate consumer demand and reduce desire A proper treatment of uncertainty leads to different conclusions. Louis Chan (1983)first considers the case of lump-sum taxes that have a known distribution acros households. However, the aggregate of future taxes and the real value of future payments on public debt are subject to uncertainty. In this case a deficit-financed tax cut has no real effects. Individuals hold their share of the extra debt because the debt is a perfect hedge against the uncertainty of the future taxes. (This analysis assumes that private credit markets have no"imperfections"of the sort discussed earlier. Suppose now that future taxes are still lump sum but have an uncertain incidence across individuals. Furthermore, assume that there are no insurance markets for relative tax risks. Then a budget deficit tends to increase the uncertainty about each individuals future disposable income. Chan(1983, p. 363)shows for the"usual case (of non-increasing absolute risk aversion) that people react by reducing current consumption and hence, by raising current private saving by more than the tax cut. Consequently, the effects on real interest rates, investment, the current account, and so on are the opposites of the standard The results are different for an income tax(Chan, 1983, pp 364-366; Robert Barsky, Gregory Mankiw and Stephen Zeldes, 1986). Suppose that each person pays the tax Tyi, where y; is the person's uncertain future income. Suppose that there are no insurance markets for individual income risks, and that T is known. (The analysis thus abstracts from uncertainties in relative tax rates across individuals )In this case a budget deficit raises the future value of T and thereby reduces the uncertainty about each individuals future disposable income. In effect, the government shares the risks about individual disposable income to a greater extent. It follows that the results are opposite to those found before; namely, a budget deficit tends to raise current consumption and hence, to raise private saving by less than the tax cut Overall, the conclusions depend on the net effect of higher mean future tax collections on the uncertainty associated with individuals' future disposable incomes Desired national saving tends to rise with a budget deficit if this uncertainty increases and vice versa The Timing of Taxes Departures from Ricardian equivalence arise also if taxes are not lump xample, with an income tax. In this situation, budget deficits change the timing of income taxes, and thereby affect people's incentives to work and produce in different