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Consumption Taxes in a Life-Cycle Framework: Are Sin Taxes Regressive?

  • Lyon, Andrew B
  • Schwab, Robert M

We construct measures of tax incidence over the life-cycle and compare these measures to traditional measures based on annual data. Annual measures of the incidence of taxes on consumption goods may differ from life-cycle measures for three reasons. First, annual measures of income reflect transitory components which should have smaller effects on consumption than permanent changes in income. Second, income measured in a single period differs from lifetime income due to age-related differences in earnings. Third, consumption of certain items follows life-cycle patterns independent of changes in income. Surprisingly, we find that these effects cause little change in the assessment of the incidence of taxes on cigarettes. For alcohol, we find that a tax on its consumption is slightly less regressive when measured with respect to lifetime income than when measured with respect to annual income. Copyright 1995 by MIT Press.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 77 (1995)
Issue (Month): 3 (August)
Pages: 389-406

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Handle: RePEc:tpr:restat:v:77:y:1995:i:3:p:389-406
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  1. Fullerton, Don & Rogers, Diane Lim, 1991. "Lifetime Versus Annual Perspectives on Tax Incidence," National Tax Journal, National Tax Association, vol. 44(3), pages 277-87, September.
  2. Atkinson, A B & Gomulka, J & Stern, N H, 1990. "Spending on Alcohol: Evidence from the Family Expenditure Survey 1970-1983," Economic Journal, Royal Economic Society, vol. 100(402), pages 808-27, September.
  3. Poterba, J.M., 1990. "Is The Gasoline Tax Regressive?," Working papers 568, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Sean Becketti & William Gould & Lee Lillard & Finis Welch, 1985. "The Panel Study of Income Dynamics After Fourteen Years: An Evaluation," UCLA Economics Working Papers 361, UCLA Department of Economics.
  5. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-30, May.
  6. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  7. Suits, Daniel B, 1977. "Measurement of Tax Progressivity," American Economic Review, American Economic Association, vol. 67(4), pages 747-52, September.
  8. Lillard, Lee A, 1977. "Inequality: Earnings vs. Human Wealth," American Economic Review, American Economic Association, vol. 67(2), pages 42-53, March.
  9. Becketti, Sean, et al, 1988. "The Panel Study of Income Dynamics after Fourteen Years: An Evaluatio n," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 472-92, October.
  10. Lee, Lung-Fei & Trost, Robert P., 1978. "Estimation of some limited dependent variable models with application to housing demand," Journal of Econometrics, Elsevier, vol. 8(3), pages 357-382, December.
  11. Davies, James B & St-Hilaire, France & Whalley, John, 1984. "Some Calculations of Lifetime Tax Incidence," American Economic Review, American Economic Association, vol. 74(4), pages 633-49, September.
  12. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
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