Consumption and Income Taxation
The contemporary preoccupation with the optimality of consumption over income taxation dwells uneasily alongside the ambiguities in the older optimal tax literature. The recent literature has become mired in questions of optimal debt policy, to such an extent that one cannot adopt a position on tax reform, without simultaneoulsy taking a position on whether the U.S. economy saves too little or too much. We argue that the case for consumption taxation is not robust to modifications of assumptions in plausible directions. In particular, straigtforward modifications of the standard microeconomic life-cycle model to incorporate liquidity constraints and a human capital decision can make it optimal to supplement a consumption tax with an interest income tax. Copyright 1990 by Royal Economic Society.
Volume (Year): 42 (1990)
Issue (Month): 1 (January)
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