Monday, April 14, 2008

James Banks and Peter Diamond weigh in on the income vs. consumption tax debate

Economists James Banks of University College, London, and the renowned Peter Diamond of MIT have posted a new paper, called "The Base for Direct Taxation."

The abstract says in part:

"The essay presents the Atkinson-Stiglitz and Chamley-Judd results that capital income should not be taxed, but concludes that the required conditions are too restrictive and not robust enough for policy purposes. Hence there should be some role for including capital income as a part of the tax base. The essay discusses some empirical underpinnings for two key elements in the conclusion - differences in savings propensities and the shape of earnings (and uncertainty about earnings) over the lifetime. The conclusion that capital income should be taxed does not lead to the conclusion that the tax base should be total income, the sum of labour income and capital income."

I couldn't resist forwarding a copy to my good friends Joe Bankman and David Weisbach, since the paper appears to line up more on my side than theirs in our recent exchange in the Stanford Law Review. But that is not to prejudge what effect, if any, a careful reading would have on one's assessment of the overall merits (and in truth my position and theirs are pretty close - we both would favor a progressive consumption tax, holding constant the political implementation variables).

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