A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Introduction 5

2
The advantage of the approach taken by Feenberg, Mitrusi, and Poterba is its simplicity. Distributional tables can be constructed using data readily available in a single year. The disadvantage is that current consumption may not be a very good proxy for lifetime income. In previous work I have shown (Caspersen and Metcalf (1994)) that distributional tables for consumption taxes using current consumption as a proxy for lifetime income underestimate the regressivity of a consumption tax. This is because the current consumption approach assumes that consumption is roughly constant over the lifetime. However, consumption exhibits the same kind of “hump” that income does over the lifetime (though not as pronounced). The same kinds of errors that occur when ranking people by annual income persist to an extent when people are ranked by consumption. Thus we should view the Feenberg, Mitrusi, and Poterba results as upper bounds on the progressivity of a shift from income to consumption taxation.

One approach to resolving this problem is to use an explicit computable general equilibrium lifecycle model to investigate the incidence of tax reforms. The work by Fullerton and Rogers (1993) is perhaps the best work in this area. Note that there are different “lifetime” experiments that one can analyze. As Poterba (1993) points out, one can look at lifetime tax burdens and/or lifetime income. Fullerton and Rogers look at the lifetime tax burden relative to lifetime income whereas Poterba (1989, 1991) and Metcalf (1993a, 1993b) look at annual tax burdens relative to lifetime income. The latter approach addresses the question of the burden of a particular year’s taxes when households are classified by a measure of economic well-being that is less prone to measurement error than annual income. The annual tax/lifetime income approach is taken in this paper. Strictly speaking, one cannot compare the results from a lifetime tax/lifetime income analysis (e.g. Fullerton and Rogers) to an annual tax/lifetime income analysis such as this one.