Don Fullerton

Who Bears the Lifetime Tax Burden

Debates about tax policy arise every year in Washington, and legislative changes occur almost as often. In just the past decade, corporate tax burdens were dramatically reduced and then subsequently increased. But who really bears the burden of taxation? Finding a satisfactory way to address this question remains one of the biggest challenges for economists. While much research has explored this issue using annual data on household incomes and expenditures, this book considers the multiple effects of taxes on individuals over their entire lifetimes. Since annual incomes typically vary from year to year, and change systematically over the course of a lifetime, annual income is not necessarily a good indicator of a persons relative well-being. Instead, Dianne Rogers and Don Fullerton categorize individuals into lifetime income groups, and re-estimate the pattern of earnings over the lifetime of each group. They utilize a general equilibrium model that encompasses household demands, work effort, and savings, and they calculate the distribution of each current tax. Because their model includes all major U.S. federal, state, and local taxes, it can be used to simulate the effects of changes in any of those taxes on investment, productivity, resource allocation, and the distribution of burdens. Don Fullerton is professor of economics at the University of Virginia and visiting professor of economics and public policy at Carnegie Mellon, School of Urban and Public Affairs. He served as Deputy Assistant Secretary of the Treasury for Tax Analysis from 1985 to 1987. Diane Lim Rogers is assistant professor of economics at Pennsylvania State University.

A Framework to Compare Environmental Policies

This paper builds a single model that can be used to show efficiency and distributional effects of eight different types of environmental policies (including taxes, subsidies, regulations, permits, and legal liability). All eight approaches can be designed to have the same efficiency effects, even while they have different distributional effects. For further evaluation of these policies, the paper discusses other criteria outside the simple model (including administrative efficiency, enforcement capabilities, and political feasibility). The paper ends with a discussion of likely trade-offs among these often-competing objectives of environmental policy.

Why Have Separate Environmental Taxes

Each environmental tax in the United States is designed to collect revenue for a trust fund used to clean up a particular pollution problem. Each might be intended to collect from a particular industry thought to be responsible for that pollution problem, but none represents a good example of an incentive-based tax designed to discourage the polluting activity itself. A different tax for each trust fund means that each tax rate is typically less than 1 percent. But each separate tax has an extra cost of administration and compliance, since taxpayers must read another set of rules and fill out another set of forms. This paper provides evidence on compliance costs that are high relative to the small revenue from each separate tax. In addition, an input-output model is used to show how current U.S. environmental tax burdens are passed from taxed industries to all other industries. Thus, the extra cost incurred to administer each separate tax achieves neither targeted incentives nor targeted burdens.

Distributional Impacts of Proposed Changes to the Social Security System

In this paper we assess the degree to which the current social security system redistributes income from rich to poor. We then estimate the impact of various proposed changes to social security on the overall redistributive effect of the system. Our analysis takes a steady-state approach in which we assume participants work their entire lives and retire under a given system. Redistribution is measured on a lifetime basis using estimated earnings profiles for a sample of people taken from the PSID. We allow for differential mortality, not only by gender and race, but also by lifetime income. Our results indicate that the current social security system redistributes less than is generally perceived, mainly because people with higher lifetime income live longer and therefore draw benefits longer. Remaining progressivity is reduced and even reversed by an increase in the assumed discount rate, since regressive taxes become more important relative to later progressive benefits. We find that many of the proposed changes to social security have surprisingly little effect on the redistribution inherent in the system.

Analytical General Equilibrium Effects of Energy Policy on Output and Factor Prices

Abstract Using an analytical general equilibrium model, we find solutions for the effect of energy policy on factor prices as well as output prices. We calibrate the model to the U.S. economy, and we consider a tax on carbon dioxide. By looking at expenditure and income patterns across household groups, we quantify the uses-side and sources-side incidence of the tax. When households are categorized either by annual income or by total annual consumption as a proxy for permanent income, the uses-side incidence is regressive. This result is robust to sensitivity analysis over various parameter values. The sources-side incidence can be progressive, U-shaped, or regressive. Results on the sources side are sensitive to parameter values.

is Social Security Part of the Social Safety Net

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a social security program that reduces overall inequality by redistributing from high‐income individuals to middle‐income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle‐ to upper‐income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well‐being, we find that Social Security becomes less progressive. Indeed, when we use an “endowment” defined by potential labor earnings at the household level rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper parts of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases in which redistribution does occur, we find that it is not efficiently targeted: many high‐income households receive positive net transfers, whereas many low‐income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as “poor.”

Distributional Aspects of Energy and Climate Policies

Governments around the globe have begun to implement various actions to limit carbon emissions and so, combat climate change. This book brings together some of the leading scholars in environmental and climate economics to examine the distributional consequences of policies that are designed to reduce these carbon emissions.

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.)

The Allocation of Permits in U.S. Climate Change Legislation

Don Fullerton and Daniel Karney of the University of Illinois take a hard look at the allocation of CO2 emissions permits under the Waxman-Markey bill and give it minimally passing marks.