In early 2011, Congress renewed the tax cuts first passed by the Bush administration in 2001 for a 2-year period. The original tax cuts were set to expire 10 years after they were first passed.
a. Assume the tax cuts were lump sum tax cuts. If Ricardian equivalence holds, what should have been the effect of the original tax cuts?
b. The original tax cuts changed income tax rates so they were not lump sum tax cuts. How does this fact change your answer to part a?