Permanent Income and the Annual Income Tax

44 Pages Posted: 27 Jul 2006  

Daniel Shaviro

New York University School of Law

Date Written: July 24, 2006

Abstract

Under a prominent and influential economic model known as the permanent income hypothesis, people's decisions depend on their expected lifetime income, not their current income. If completely true, this hypothesis would have radical implications for tax, transfer, and entitlements policy. For example, unless modified by other information, it would suggest replacing the income tax with a consumption tax, establishing lifetime income averaging, viewing Social Security as irrelevant other than as a system for transferring lifetime resources between individuals, and dramatically changing welfare law to base aid purely on people's lifetime income, as distinct from their current circumstances. However, incomplete markets and departures from rational behavior, by shortening people's planning horizons, weaken some of permanent income's implications and refute others.

Suggested Citation

Shaviro, Daniel, Permanent Income and the Annual Income Tax (July 24, 2006). NYU, Law and Economics Research Paper No. 06-28. Available at SSRN: https://ssrn.com/abstract=920622 or http://dx.doi.org/10.2139/ssrn.920622

Daniel Shaviro (Contact Author)

New York University School of Law ( email )

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New York, NY 10012-1099
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212-995-4341 (Fax)

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