Who Bears the Lifetime Tax Burden?

• Author: Brown, Douglas M.

This book constructs a lifetime income (LI) general equilibrium model of the U.S. economy to analyze the efficiency and equity effects of actual and prospective taxes. It employs more sophisticated methods than earlier computable general equilibrium models of tax incidence based on annual data. It reaches some different conclusions than the earlier work by the late Joseph Pechman on who bears the burden of taxes in this country. The book is comprised of nine chapters.

Chapter One is a somewhat lengthy but nonetheless crisp introduction and summary. The authors begin with a careful discussion of why LI rather than annual or life cycle income data are required for determining tax burdens. The procedure employed to calculate LI in this book requires five steps. First, from the Panel Study of Income Dynamics (PSID) for the 1970-1987 period, wage functions are estimated and used to obtain wage profiles, which allows one to calculate the present value of potential LI. Individuals are then ranked by LI, and classified into twelve income groups. Second, within each LI group wage profiles are reestimated by age; also, age profiles are estimated for taxes and transfers. Third, Consumer Expenditure Survey data are used to estimate how individuals allocate consumption among specific goods and services. Fourth, a general equilibrium simulation model is constructed comprising nearly all U.S. taxes, seventeen industries (broken down by corporate and noncorporate sectors, by industry), and consumers. Each individual begins "life" with a given inheritance, a set of tax rates, wage profile, and a transfer profile. Each person plans a lifetime of labor supply, savings, demand for goods, and bequests. Industry's use of labor, capital, and intermediate inputs represent the supply side of the picture. The effects of tax changes on economic decisions are simulated through time. Welfare changes are computed using equivalent variations. Fifth, the effects of taxes are made by comparing the base case burden with that of a proportional tax which raises the same revenue. The findings are that personal income taxes are moderately progressive, while sales and excise and payroll taxes are regressive. Capital taxes affect those with low and high incomes more than individuals in the middle of the income distribution. An unexpected result is that the corporate income tax is found to be regressive.

Chapter Two discusses the theoretical basis of the lifetime incidence model...