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Taxation and Excess Burden: A Life Cycle Perspective

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  • Driffill, E John
  • Rosen, Harvey S

Abstract

A lifetime perspective is appropriate in assessing the welfare implications of government tax policies. Although a number of attempts have been made to ex- amine the excess burden of taxation in life-cycle models, these have tended to ignore the role of human capital accumulation and/or the leisure-income choice. In this paper, we do numerical simulations with a model that takes both of these phenomena into account. We find that under reasonable assumptions, the failure to take into account distortions of human capital decisions produces substantial underestimates of the excess burden of income taxation. In addition, allowing for the endogeneity of human capital increases the efficiency of a personal consumption tax relative to that of an equal yield income tax.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 24 (1983)
Issue (Month): 3 (October)
Pages: 671-83

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Handle: RePEc:ier:iecrev:v:24:y:1983:i:3:p:671-83

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References

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  1. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
  2. Haley, William J, 1976. "Estimation of the Earnings Profile from Optimal Human Capital Accumulation," Econometrica, Econometric Society, vol. 44(6), pages 1223-38, November.
  3. Alan S. Blinder & Yoram Weiss, 1975. "Human Capital and Labor Supply: A Synthesis," NBER Working Papers 0067, National Bureau of Economic Research, Inc.
  4. Alan J. Auerbach & Harvey S. Rosen, 1980. "Will the Real Excess Burden Please Stand Up? (Or, Seven Measures in Search of a Concept)," NBER Working Papers 0495, National Bureau of Economic Research, Inc.
  5. Rosen, Harvey S, 1978. "The Measurement of Excess Burden with Explicit Utility Functions," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S121-35, April.
  6. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  7. Ryder, Harl E & Stafford, Frank P & Stephan, Paula E, 1976. "Labor, Leisure and Training over the Life Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(3), pages 651-74, October.
  8. Lawrence H. Summers, 1978. "Tax Policy in a Life Cycle Model," NBER Working Papers 0302, National Bureau of Economic Research, Inc.
  9. Levhari, David & Sheshinski, Eytan, 1972. "Lifetime Excess Burden of a Tax," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 139-47, Jan.-Feb..
  10. Rosen, Sherwin, 1976. "A Theory of Life Earnings," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S45-67, August.
  11. Auerbach, Alan J., 1979. "A brief note on a non-existent theorem about the optimality of uniform taxation," Economics Letters, Elsevier, vol. 3(1), pages 49-52.
  12. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
  13. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
  14. Kesselman, Jonathan R., 1976. "Tax effects on job search, training, and work effort," Journal of Public Economics, Elsevier, vol. 6(3), pages 255-272, October.
  15. Brown, Charles, 1976. "A Model of Optimal Human-Capital Accumulation and the Wages of Young High School Graduates," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 299-316, April.
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Citations

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Cited by:
  1. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December.
  2. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, Elsevier.
  3. Annette Alstadsæter & Ann-Sofie Kolm & Birthe Larsen, 2005. "Tax Effects, Search Unemployment, and the Choice of Educational Type," CESifo Working Paper Series 1622, CESifo Group Munich.
  4. Berthold U. Wigger, 2004. "On the Intergenerational Incidence of Wage and Consumption Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(1), pages 1-23, 02.
  5. Annette Alstadsæter & Ann-Sofie Kolm & Birthe Larsen, 2005. "Tax Effects on Unemployment and the Choice of Educational Type," Discussion Papers 419, Research Department of Statistics Norway.
  6. Alstadsí¦ter, Annette & Kolm, Ann-Sofie & Larsen, Birthe, 2008. "Money or joy: The choice of educational type," European Journal of Political Economy, Elsevier, vol. 24(1), pages 107-122, March.
  7. Cruz Echevarria & Amaia Iza, 2000. "Income Taxation and Finite Horizons in a Human Capital Model," International Tax and Public Finance, Springer, vol. 7(6), pages 665-689, December.
  8. George R. Zodrow, 2007. "Should Capital Income be Subject to Consumption-Based Taxation?," Working Papers 0715, Oxford University Centre for Business Taxation.
  9. Hisham S. El-Osta, 2010. "Inequality decomposition of farm family living expenditures and the role of the life cycle," Agricultural Finance Review, Emerald Group Publishing, vol. 70(2), pages 245-266, August.
  10. Lin, Shuanglin, 1999. "Tax reform and external balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 891-909, December.
  11. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-33, August.
  12. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
  13. Alstadsæter, Annette & Kolm, Anne-Sofie & Larsen, Birthe, 2005. "Money or Joy," Working Papers 23-2005, Copenhagen Business School, Department of Economics.
  14. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  15. Geir Haakon Bjertnæs, 2001. "Optimal Combinations of Income Tax and Subsidies for Education," Discussion Papers 313, Research Department of Statistics Norway.
  16. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
  17. Echevarría Olave, Cruz Angel, 2003. "Life Expectancy, Schooling Time and Endogenous Growth," DFAEII Working Papers 2002-11, University of the Basque Country - Department of Foundations of Economic Analysis II.

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