A Lifetime Income Tax
43 Pages Posted: 18 Feb 2005
Date Written: February 17, 2005
Under current tax law, there can be considerable period-by-period divergence between a taxpayer's after-tax income and her desired or actual consumption. This divergence will cause the taxpayer to borrow. One can view such borrowing either as being incurred to fund consumption, or as being incurred to fund the taxpayer's income tax payments. If one takes the latter view, one can ask whether a good income tax law should force a taxpayer to borrow to pay her taxes. I answer the question in the negative, and propose a lifetime income tax that would eliminate the need for typical taxpayers to borrow to pay their income tax liabilities. Under such a regime, a typical taxpayer would reap an affirmative benefit over her lifetime, because she would be able to transfer borrowing from herself (a relatively inefficient borrower) to the government (a relatively efficient borrower).
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