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http://ssrn.com/abstract=955351
 
 

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Beyond the Pro-Consumption Tax Consensus


Daniel Shaviro


New York University School of Law

January 2007

NYU Law and Economics Research Paper No. 07-04

Abstract:     
In the last two decades, the dominant norm in fundamental tax reform has shifted from income taxation to consumption taxation, among academics no less than policymakers. Few have recognized, however, that the case for a consumption tax overlaps substantially with that for lifetime income averaging, an idea that has drawn considerably less support. Likewise, few have recognized that the grounds for unease about the case for income averaging (as an ideal system, leaving aside administrative concerns) apply equally to the case for consumption taxation.

Within a welfare economics framework, the case for both norms is close to irrefutable if one makes three key assumptions: that markets are complete, that individuals engage in consistent rational choice given their preferences, and that the only relevant information about taxpayer "ability" is that provided by an undifferentiated measure of lifetime earnings. Where these assumptions fail to hold, (1) allowing income averaging between periods may be undesirable, (2) the case for a consumption tax becomes less clearcut, and (3) as revealed by the "new dynamic public finance" literature in economics, there may actually be a strong rationale for taxing saving.

Number of Pages in PDF File: 53

Keywords: income averaging, tax reform, optimal income taxation, consumption taxation, permanent income hypothesis

JEL Classification: H20, H21, H24, H31

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Date posted: January 7, 2007  

Suggested Citation

Shaviro, Daniel, Beyond the Pro-Consumption Tax Consensus (January 2007). NYU Law and Economics Research Paper No. 07-04. Available at SSRN: http://ssrn.com/abstract=955351 or http://dx.doi.org/10.2139/ssrn.955351

Contact Information

Daniel Shaviro (Contact Author)
New York University School of Law ( email )
40 Washington Square South
Room 314-B
New York, NY 10012-1099
United States
212-998-6187 (Phone)
212-995-4341 (Fax)
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