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The transition to consumption taxation, Part 2: the impact on existing financial assets

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  • Alan D. Viard

Abstract

Replacing the income tax with a consumption tax is likely to reduce the total value of the capital stock. Alan D. Viard reviews how this decline is divided between bondholders and stockholders and the effect on household borrowers and lenders. He explains that the results depend on whether monetary policy accommodates the tax through a higher price level. Without accommodation, the decline in the value of capital is largely borne by stockholders and there is little reallocation of wealth between household borrowers and lenders. If the tax is fully accommodated, bondholders bear heavier burdens than stockholders and household borrowers gain at the expense of the household lenders.

Suggested Citation

  • Alan D. Viard, 2001. "The transition to consumption taxation, Part 2: the impact on existing financial assets," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 20-31.
    • Handle: RePEc:fip:fedder:y:2001:i:qii:p:20-31
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    References listed on IDEAS

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    1. Gregory W. Huffman & Evan F. Koenig, 1998. "The dynamic impact of fundamental tax reform part 1: the basic model," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q 1, pages 24-37.
    2. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050, Elsevier.
    3. Alan D. Viard, 2000. "The transition to consumption taxation, part 1: the impact on existing capital," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q3, pages 2-22.
    4. Gregory W. Huffman & Evan F. Koenig, 1998. "The dynamic impact of fundamental tax reform part 2 : extensions," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-1.
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