On the Taxation of Life Income

Abstract

A t t to year. Legislation, both in the United States and in Canada, has provided es rac for some relief through limited averaging provisions. This paper explores the properties ofa tax system that basesits levy on the income earned over the taxpayers' entire life. The complications caused by errors in the outcome estimates, inflation, variations in interest rates, property income, capital market imperfections, and rate changes are discussed. Potential improvements through the successful implementation of a life income tax system include the equal treatment of equals, the possible inclusion ofreal capital gains in the tax base, and the neutral treatment of human and physical capital. ON THE TAXATION OF LIFE INCOME ANTAL DEUTSCHMcGill University -Imagine 2 persons with identical families and lifetime _ incomes. One person is a plumber who started work at age 16 and will retire at 65. The other is a surgeon whose professional life runs from age 28 to 45. With the existing system of income tax, where annual incomes are taxed at progressive rates, over his lifetime the surgeon pays more. 1 If on the strength of the information given, the reader deems the plumber and the surgeon to be equal in terms of ability to pay taxes, in his view horizontal equity has been violated. The remainder of this paper is devoted to a system of taxation where this type of inequity does not occur. [299) at The University of Melbourne Libraries on June 5, 2016 pfr.sagepub.com Downloaded from P t B-= -(y. -D.) J p. J J J where P, = the price index in year t P j = the price index in year j Y j = taxable income in year j, expressed in dollars [2]at The University of Melbourne Libraries on June 5, 2016 pfr.sagepub.com Downloaded from

The Lifetime Incidence of Consumption Sales Taxes

“…Traditionally, taxes have been described as regressive, propor tional, or progressive depending on whether the ratio of annual taxes to annual income falls, remains constant, or rises across individuals ranked by annual income levels. By this standard consumption sales • taxes are generally regarded as regressive because the average propen* sity to consume from annually measured income declines as annual income rises,-^Various authors [1,2,6,8,9] have noted the defir ciencies of measuring incidence in terms of annual data and some have considered incidence in terms of the relation between lifetime taxes and lifetime income. However, two of the most widely read public finance textbooks [6,7] contain incorrect conclusions regarding the lifetime incidence of consumption sales taxes.…”