Wednesday, October 26, 2005
Kirk J. Stark (UCLA) presents Time Consistency and the Choice of Tax Base, at the University of Toronto today at 12:10 pm - 1:45 pm as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:
This article examines how time consistency problems (i.e., an inability to commit to future government policies) complicate the debate over the choice of tax base, with a specific emphasis on arguments in support of consumption taxes. Tax policy literature generally categorizes consumption taxes as either “prepaid” (the yield-exempt model) or “postpaid” (the cash-flow model). Conventional wisdom among tax scholars is that these two types of consumption taxes are economic equivalents under certain assumptions. The principal advantage of a consumption tax of either form, it is generally argued, is its neutrality with regard to the timing of the taxpayer’s consumption. I argue that the two models require very different government precommitments in order to deliver this neutrality benefit. Prepaid consumption taxes require a commitment from the government not to tax investment gains (interest, dividends, etc…)—what I will call a yield-exemption commitment. By contrast, postpaid consumption taxes require a commitment from the government not to vary tax rates across time—what I will call a constant tax rate commitment. The article considers precommitment norms in U.S. tax policy and attempts to show that yield-exemption commitments are familiar and credible, while constant tax rate commitments are extremely rare. Consequently, prepaid consumption taxes are superior to postpaid consumption taxes in terms of their ability to deliver the neutrality benefits commonly cited in support of consumption taxes. In addition, where the government’s commitment to constant tax rates is especially weak, postpaid consumption taxes and income taxes will have similar effects on the timing of taxpayers’ consumption decisions.