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Transitional Protection During Conversion to a Personal Consumption Tax

Author

Listed:
  • Kenneth A. Lewis

    (University of Delaware)

  • Laurence S. Seidman

    (University of Delaware)

Abstract

This article constructs a transitional protection rule-an “old-wealth deduction†-for conversion of the income tax to a personal consumption tax and tests it in four stylized life cycle economies (identical, pension, bequest, and spender) by performing numerical simulations. It is assumed that the compensated elasticity of saving with respect to the interest rate is zero (the uncompensated elasticity is negative). In all four economies, the protection rule substantially reduces the harm to older cohorts from tax conversion; at the same time, young and future cohorts continue to benefit (in almost all cases) from tax conversion despite this protection rule. The results may be sensitive to the particular functions used in the model: a Cobb-Douglas production function and a Leontief utility function (implying a zero compensated saving elasticity).

Suggested Citation

  • Kenneth A. Lewis & Laurence S. Seidman, 2000. "Transitional Protection During Conversion to a Personal Consumption Tax," Public Finance Review, , vol. 28(2), pages 99-119, March.
    • Handle: RePEc:sae:pubfin:v:28:y:2000:i:2:p:99-119
    DOI: 10.1177/109114210002800201
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    References listed on IDEAS

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    1. Lord, William, 1989. "The transition from payroll to consumption receipts with endogenous human capital," Journal of Public Economics, Elsevier, vol. 38(1), pages 53-73, February.
    2. Ginsburg, Martin D., 1995. "Life Under a Personal Consumption Tax: Some Thoughts on Working, Saving, and Consuming in Nunn-Domenici's Tax World," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(4), pages 585-602, December.
    3. James M. Poterba, 1994. "Public Policies and Household Saving," NBER Books, National Bureau of Economic Research, Inc, number pote94-2.
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    5. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-544, September.
    6. Laurence S. Seidman & Kenneth A. Lewis, 1997. "The Design of a Tax Rule for Owner-Occuped Housing Under a Personal Consumption Tax," Public Finance Review, , vol. 25(1), pages 5-24, January.
    7. Sarkar, Shounak & Zodrow, George R., 1993. "Transitional Issues in Moving to a Direct Consumption Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 46(3), pages 359-376, September.
    8. Lewis, Kenneth A. & Seidman, Laurence S., 1994. "A phased increase in the U.S. investment rate: Sacrifice times, T-year gains, and investment rate returns," Journal of Policy Modeling, Elsevier, vol. 16(6), pages 653-676, December.
    9. Laurence S. Seidman, 1997. "A Progressive Consumption Tax," Challenge, Taylor & Francis Journals, vol. 40(6), pages 63-84, November.
    10. Gilbert E. Metcalf, 1994. "Life Cycle versus Annual Perspectives on the Incidence of a Value Added Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 8, pages 45-64, National Bureau of Economic Research, Inc.
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    13. Sarkar, Shounak & Zodrow, George R., 1993. "Transitional Issues in Moving to a Direct Consumption Tax," National Tax Journal, National Tax Association, vol. 46(3), pages 359-76, September.
    14. Ginsburg, Martin D., 1995. "Life Under a Personal Consumption Tax: Some Thoughts on Working, Saving, and Consuming in Nunn-Domenici's Tax World," National Tax Journal, National Tax Association, vol. 48(4), pages 585-602, December.
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    Cited by:

    1. Thomas Gaube & Robert Schwager, 2004. "Does Old Capital Matter for Implementing a Pareto-Improving Tax Reform?," Public Finance Review, , vol. 32(2), pages 220-231, March.
    2. 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.

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