People are myopic: Most skeptics argue that even though
the proposition predicts that consumers will not increase
consumption when taxes are cut, in reality lower taxes
are likely to increase consumption and decrease saving
as it is likely that most consumers do not understand
that the increase in government borrowing today is
likely to lead to higher taxes in the future. Hence,
consumers may respond to the current tax cut as they
would respond to any increase in current income by
increasing consumption.
Presence of a liquidity constraint: An underlying
assumption of the Ricardian theory is the existence of
perfect capital markets i.e. the ability for individuals to
borrow and save whenever they want.
Advocates of the traditional view argue that many
people cannot borrow. They would like to consume
more today, but because of liquidity constraints, they
are constrained to consuming less than they would want
according to their permanent income. Therefore a tax
cut for these people eases their liquidity constraint and
allows them to consume more.
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