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Beyond the Pro-Consumption Tax Consensus

Daniel Shaviro
Stanford Law Review
Vol. 60, No. 3 (Dec., 2007), pp. 745-788
Published by: Stanford Law Review
Stable URL: http://www.jstor.org/stable/40040364
Page Count: 44
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Beyond the Pro-Consumption Tax Consensus
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Abstract

In the last two decades, the dominant norm in fundamental tax reform has shifted from income taxation to consumption taxation, among academics no less than policymakers. Few have recognized, however, that the case for a consumption tax overlaps substantially with that for lifetime income averaging, an idea that has drawn considerably less support. In particular, the case for both is strongest if one accepts the permanent income hypothesis, which holds that people's consumption decisions depend on expected lifetime income, not current-period income. Likewise, few have recognized that the grounds for unease about the case for income averaging (as an ideal system, leaving aside administrative concerns) apply equally to the case for consumption taxation. Within a welfare economics framework, the case for both norms is close to irrefutable if one makes three key assumptions: that markets are complete, that individuals engage in consistent rational choice given their preferences, and that the only relevant information about taxpayer "ability" is that provided by an undifferentiated measure of lifetime earnings. These assumptions often fail to hold. Where they fail, (1) allowing income averaging between periods may be undesirable, (2) the case for a consumption tax becomes less clear-cut, although still compelling on administrative grounds, and (3) as revealed by the "new dynamic public finance" literature in economics, there is a strong rationale for taxing saving, as does an income tax but not a consumption tax.

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