The difficulty of making a transition from an income-type to a con-sumption-type tax is often cited as an obstacle to such a change in policy. Put simply, the problem is the double taxation of "old savings" or "old capital". A person who has accumulated wealth under an income tax will be hit with an extra tax on the consumption financed by that accumulation under a shift to consumption tax. Such a transition effect raises issues of equity, political feasibility, and efficiency. In the typical implementation of a con-sumption tax, the same sorts of transition phenomena associated with a shift from an income tax follow from any change in the rate of tax. That is, introduction of a consumption tax is the same as raising the rate of consumption tax from zero to what-ever positive rate is envisioned for the new system. Consequently, the problem of tran-sition to a consumption tax generalizes to the problem of changing the rate of consumption tax. In this paper I consider the design of rules that render consumption taxes in the family of business cash-flow taxes immune to the incentive and in-cidence effects of changes in rate of tax. I show that two relatively simple approaches are available to deal with it: grandfathering the tax rate applicable to a given period's investment or substituting depreciation allowances for the usual expensing of investment, coupled with a credit for the equivalent of interest on the undepreciated investment stock. A cost of this approach is its requirement to identify true depreciation and, in the second case, the real rate of interest.
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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 148.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kaplow, Louis & Shavell, Steven, 2002.
"Economic analysis of law,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 25, pages 1661-1784
Elsevier.
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David F. Bradford, 2003.
"The X Tax in the World Economy,"
Working Papers
109, Princeton University, Department of Economics, Center for Economic Policy Studies..
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