The regressivity of the tax reform is reduced significantly when I shift to a lifetime income analysis. The variation in changes in tax liabilities across lifetime income deciles falls markedly relative to the annual income analysis. The reform is still regressive – the lowest 70 percent of the income distribution face tax increases while the top 30 percent enjoy tax decreases. However the differences are not nearly as large as when measured using annual income to rank households. Moreover, the change in average tax rates is much smaller with the lowest lifetime income group facing an average increase in their average tax rate of 7.8 percentage points while the top decile’s average tax rate falls by 3.5 percentage points. Ranking households by lifetime income, the Suits Index now falls from 0.068 to -0.045 with this tax reform. Unlike in the previous tax shifts, the cohort analysis provides results more similar to the annual income approach than to the lifetime income approach. The sensitivity of distributional results for a consumption tax reform to how lifetime income is measured suggests that one should be cautious in using annual income and consumption data to try to measure distributional effects based on lifetime or permanent income.

One misconception about consumption tax reform (and, in particular, a reform that involves a value added tax or a national retail sales tax) is that it is by definition regressive. It would be possible to add progressive elements to the reform to mitigate regressivity. I next illustrate this point by modifying the national retail sales tax to incorporate a family rebate. I model the rebate on the proposal of Burton and Mastromarco (1996). Burton and Mastromarco (1996) have proposed providing universal rebates to households equal to the poverty level to build progressivity into the tax system.