Long-lived households. What we literally need here is that the planning horizon of the household is as long as the government’s planning horizon. Since governments typically live much longer than individuals, one might question the empirical relevance of this assumption. To see what can ‘go wrong’ if households have short planning horizons, consider the case of an individual in retirement. If the government cuts this person’s taxes today and increases taxes at some point in the distant horizon, then our retired individual is unlikely to ‘be around’ to settle the higher future tax bill (he will have cleverly escaped his tax obligation by dying). For such an individual, a deficit-financed tax cut constitutes an increase in wealth.
