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Taxation, Uncertainty and the Choice of a Consumption Tax Base

In: TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow

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  • George R. Zodrow

Abstract

Several observers have concluded that the equivalence between the cash flow and wage tax approaches to direct consumption taxation breaks down in the presence of uncertainty, as individuals with extraordinarily large gains are treated too generously under the latter approach. In particular, Ahsan (Journal of Public Economics, 1989, 40, 99–134; Canadian Journal of Economics, 1990, 23, 408–433) contends that equivalence obtains only if returns in excess of a safe rate of return are included in the wage tax base. This paper constructs an alternative and arguably more plausible model under which full equivalence between the two approaches obtains even in the presence of uncertainty. It also derives Ahsan’s result in a more general context, and demonstrates that the divergence between the two analyses is attributable to different assumptions regarding the cost to the government of an uncertain revenue stream.

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  • George R. Zodrow, 2019. "Taxation, Uncertainty and the Choice of a Consumption Tax Base," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 8, pages 227-237, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811205149_0008
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    1. Ahsan, Syed M., 1989. "Choice of tax base under uncertainty : Consumption or income?," Journal of Public Economics, Elsevier, vol. 40(1), pages 99-134, October.
    2. Syed M. Ahsan, 1990. "Risk-Taking, Savings, and Taxation: A Re-examination of Theory and Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 23(2), pages 408-433, May.
    3. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(2), pages 263-283.
    4. McLure, Charles E. Jr., 1992. "Substituting Consumption-Based Direct Taxation for Income Taxes as the International Norm," National Tax Journal, National Tax Association;National Tax Journal, vol. 45(2), pages 145-154, June.
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    6. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    7. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 1-27.
    8. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 295-304, National Bureau of Economic Research, Inc.
    9. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
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    Cited by:

    1. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    2. Kramer, Frank, 2009. "Symmetric cash flow-taxation and cross-border investments," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2009-03, University of Bayreuth, Chair of Finance and Banking.
    3. Paolo M. Panteghini, 2009. "On the equivalence between labor and consumption taxation," Economics Bulletin, AccessEcon, vol. 29(2), pages 622-629.
    4. David F. Bradford, 2003. "The X Tax in the World Economy," Working Papers 109, Princeton University, Department of Economics, Center for Economic Policy Studies..
    5. Syed M. Ahsan & Panagiotis Tsigaris, 2009. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," Public Finance Review, , vol. 37(6), pages 710-731, November.
    6. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
    7. Ira Horowitz & R. Horowitz, 1999. "Risky Assets and the Choice of Tax Base," Public Finance Review, , vol. 27(5), pages 467-480, September.
    8. David F. Bradford, 2003. "The X Tax in the World Economy," Working Papers 109, Princeton University, Department of Economics, Center for Economic Policy Studies..
    9. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    10. Igor Kotlán & Zuzana Machová & Lenka Janíčková, 2011. "Vliv zdanění na dlouhodobý ekonomický růst [Taxation Influence on the Economic Growth]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(5), pages 638-658.
    11. William M. Gentry & R. Glenn Hubbard, 1997. "Distributional Implications of Introducing a Broad-Based Consumption Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 1-48, National Bureau of Economic Research, Inc.
    12. Bradford, David F, 2003. "Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(5), pages 591-610, September.
    13. repec:pri:cepsud:93bradford is not listed on IDEAS
    14. Sanjit Dhami, 2002. "Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 673-685, November.
    15. Dirk Schindler, 2008. "Taxing Risky Capital Income - A Commodity Taxation Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(3), pages 311-333, September.
    16. Kent A. Smetters, 2003. "Trading with the Unborn: A New Perspective on Capital Income Taxation," NBER Working Papers 9412, National Bureau of Economic Research, Inc.
    17. McLure, Charles E, 1996. "The US debate on comsuption-based taxes: implication for the Americas," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34292, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

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