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Taxation, uncertainty and the choice of a consumption tax base

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  • Zodrow, George R.

Abstract

Several observers have concluded that the equivalence between the cash flow and wage tax approaches to direct consumption taxation breaks down in the presence of uncertainty, as individuals with extraordinarily large gains are treated too generously under the latter approach. In particular, Ahsan (Journal of Public Economics, 1989, 40, 99–134; Canadian Journal of Economics, 1990, 23, 408–433) contends that equivalence obtains only if returns in excess of a safe rate of return are included in the wage tax base. This paper constructs an alternative and arguably more plausible model under which full equivalence between the two approaches obtains even in the presence of uncertainty. It also derives Ahsan’s result in a more general context, and demonstrates that the divergence between the two analyses is attributable to different assumptions regarding the cost to the government of an uncertain revenue stream.
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  • Zodrow, George R., 1995. "Taxation, uncertainty and the choice of a consumption tax base," Journal of Public Economics, Elsevier, vol. 58(2), pages 257-265, October.
    • Handle: RePEc:eee:pubeco:v:58:y:1995:i:2:p:257-265
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    1. Ahsan, Syed M., 1989. "Choice of tax base under uncertainty : Consumption or income?," Journal of Public Economics, Elsevier, vol. 40(1), pages 99-134, October.
    2. Syed M. Ahsan, 1990. "Risk-Taking, Savings, and Taxation: A Re-examination of Theory and Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 23(2), pages 408-433, May.
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    7. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 1-27.
    8. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 295-304, National Bureau of Economic Research, Inc.
    9. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
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    Cited by:

    1. Kramer, Frank, 2009. "Symmetric cash flow-taxation and cross-border investments," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2009-03, University of Bayreuth, Chair of Finance and Banking.
    2. Paolo M. Panteghini, 2009. "On the equivalence between labor and consumption taxation," Economics Bulletin, AccessEcon, vol. 29(2), pages 622-629.
    3. David F. Bradford, 2003. "The X Tax in the World Economy," Working Papers 109, Princeton University, Department of Economics, Center for Economic Policy Studies..
    4. David F. Bradford, 2003. "The X Tax in the World Economy," Working Papers 109, Princeton University, Department of Economics, Center for Economic Policy Studies..
    5. Bradford, David F, 2003. "Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(5), pages 591-610, September.
    6. Syed M. Ahsan & Panagiotis Tsigaris, 2009. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," Public Finance Review, , vol. 37(6), pages 710-731, November.
    7. Dirk Schindler, 2008. "Taxing Risky Capital Income - A Commodity Taxation Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(3), pages 311-333, September.
    8. Kent A. Smetters, 2003. "Trading with the Unborn: A New Perspective on Capital Income Taxation," NBER Working Papers 9412, National Bureau of Economic Research, Inc.
    9. McLure, Charles E, 1996. "The US debate on comsuption-based taxes: implication for the Americas," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34292, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    10. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
    11. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    12. Ira Horowitz & R. Horowitz, 1999. "Risky Assets and the Choice of Tax Base," Public Finance Review, , vol. 27(5), pages 467-480, September.
    13. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    14. Igor Kotlán & Zuzana Machová & Lenka Janíčková, 2011. "Vliv zdanění na dlouhodobý ekonomický růst [Taxation Influence on the Economic Growth]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(5), pages 638-658.
    15. William M. Gentry & R. Glenn Hubbard, 1997. "Distributional Implications of Introducing a Broad-Based Consumption Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 1-48, National Bureau of Economic Research, Inc.
    16. repec:pri:cepsud:93bradford is not listed on IDEAS
    17. Sanjit Dhami, 2002. "Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 673-685, November.

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