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Consumption Taxes: Some Fundamental Transition Issues

  • David Bradford

A number of tax reform plans under discussion in the United States would replace the existing hybrid income-based system with a consumption-based system. In this paper I use uniform (single-rate) consumption and income taxes: (a) to explain how the problem of taxing "old savings" or "old capital" manifests itself in the shift from an income to a consumption base; (b) to indicate the tradeoffs that must be confronted in dealing with this phenomenon; (c) to show how price level changes that may or may not accompany a transition affect the distribution of gains and losses; (d) to sketch out how a transition might affect interest rates and asset prices (including owner-occupied housing); (e) to explore the case in equity for protecting the tax-free recovery of old savings; and (f) to enphasize the incentive problems that arise if savers and investors anticipate a change in the change in the tax rate in a consumption-based system.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 95-15.

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Handle: RePEc:kud:epruwp:95-15
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  1. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  2. Christian Keuschnigg, 1990. "The Transition to a Cash Flow Income Tax," Discussion Paper Serie A 276, University of Bonn, Germany.
  3. Alan A. Tait, 1991. "Value-Added Tax; Administrative and Policy Issues," IMF Occasional Papers 88, International Monetary Fund.
  4. David F. Bradford, 1991. "Market Value versus Financial Accounting Measures of National Saving," NBER Chapters, in: National Saving and Economic Performance, pages 15-48 National Bureau of Economic Research, Inc.
  5. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
  6. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  7. Browning, Edgar K, 1978. "The Burden of Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 649-71, August.
  8. David F. Bradford, 1993. "Market Value Vs. Financial Accounting Measures of National Saving," NBER Working Papers 2906, National Bureau of Economic Research, Inc.
  9. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  10. Howitt, Peter & Sinn, Hans-Werner, 1989. "Gradual Reforms of Capital Income Taxation," Munich Reprints in Economics 19370, University of Munich, Department of Economics.
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