Andrew B. Lyon

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

In this paper we construct measures of tax incidence over the life-cycle and compare these measures to traditional measures based on annual data. We show that 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 almost no change in the assessment of the incidence of taxes applying to the consumption of cigarettes. For alcohol, however, 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.

Progressivity of Capital Gains Taxation with Optimal Portfolio Selection

We provide new data on capital gains realizations using a five-year stratified panel of taxpayers covering 1985-1989. We find, as earlier studies have, that capital gains realizations are very concentrated among the highest income groups. We use these data and data from the Federal Reserve Board Survey of Consumer Finances to draw inferences from a simulation model of the effects on progressivity and efficiency of alternative tax treatment of capital gains. Tax payments alone are not an accurate indication of the burden of a tax. Taxes generally create costs beyond the dollar value collected by causing persons to change their behavior to avoid the tax. Risk is also affected by the tax system. Beneficial risk-sharing characteristics of the tax system are frequently overlooked when examining the treatment of capital gains, We find that reforms comprising reductions in the capital gains tax rate offset by increases in the tax rate on other investment income are efficiency reducing. Surprisingly, we find that for taxpayers for whom loss limits are not binding a switch to accrual taxation is also efficiency reducing. For those taxpayers for whom loss limits are potentially binding, we find that large efficiency gains can be achieved by increasing the amount of capital losses that may be deducted against ordinary income. These results are partly attributable to changes in risk-sharing encompassed in these reforms.

Optimality of the Foreign Tax Credit System: Separate vs. Overall Limitations

Foreign tax credit systems limit the extent to which foreign tax credits can be used to offset tax liability in the taxpayer’s home country. We examine how two methods of limiting foreign tax credits, separate limitations based on type or source of income or an overall limitation aggregating across all foreign income, affect the optimal allocation of capital. We show that when investment opportunities exist in both low-tax and high-tax countries, a separate limitation method will always result in an inefficient allocation of capital. In some circumstances, an overall limitation can result in the optimal allocation of capital. In other cases, both limitation methods will result in an inefficient allocation of capital. In these cases either limitation method can be relatively more efficient. Simulations show that the potential differences in economic welfare under the alternative limitation methods can be significant. We consider the limitation methods in multiple settings, including the presence of pre-existing foreign income and allocation rules, such as interest allocation.

Uncertainty, Welfare Cost and the "Adaptability" of U.S. Corporate Taxes

Alternative corporate tax systems differ in their ability to adapt to changes in the rate of inflation. Absent complete indexing of depreciation allowances, a tax system may use the expected inflation rate to set accelerated depreciation allowances in a way that minimizes the welfare loss from them is allocation of capital. This welfare loss is a nonlinear function of the assumed inflation rate, however, so the welfare loss at the expected inflation rate may be quite different from the expected welfare loss. We compute these two welfare concepts for each of three alternative corporate tax schemes in the U.S. and for two different relationships between inflation and interest rates. One important finding is that the Auerbach-Jorgenson first year recovery plan is not equivalent to indexing as is often claimed, if uncertainty about inflation implies uncertainty about the real after-tax discount rate.(This abstract was borrowed from another version of this item.)

Uncertain Parameter Values and the Choice among Policy Options

In this paper, we use tax policy choices to illustrate and investigate the more general problem of using uncertain parameter values in models to evaluate policy choices. We show, for this tax example, how debate on an elasticity parameter translates into a debate about policy choices, andvice versa. To construct this example, we suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain. We show how this gain from each reform depends upon the elasticity of saving with respect to the net rate of return. Within quite narrow and reasonable bounds for the elasticity parameter, we find regions in which each of three different tax reforms turns out to dominate the others.