In this note the possibility is demonstrated that a movement between a broadly based income tax and a consumption tax in a two-period consumption loan model can be completely accommodated by interest rate changes which leave real intertemporal consumption plans unchanged. Income and consumption taxes are both broadly based taxes, the former taxing all potential consumption in any period and the latter actual consumption. Lenders and borrowers face the same prices under both tax regimes and movements between the two can, in this simple model, be wholly accommodated by interest rate changes leaving intertemporal consumption plans unaffected. This result contrasts with the conventional argument in favor of a consumption tax in preference to an income tax on the basis of lack of distortion of savings behavior. It is not suggested that because of this result exact monetary accommodation to consumption income tax variations will occur in all circumstances, but it seems to be of interest to note that such adjustments are possible and these appear not to have been previously considered. The traditional argument for the distorting effects of an income tax over a consumption tax is often made in a simple two-period intertemporal consumption choice model. If an individual receives income Y,, YK in each of two periods and if the interest rate is r, then, so the argument goes, the slope of an individual's budget constraint between current and future consumption (C, and C2) is not disturbed by a consumption tax, whereas it is under an income tax. If interest is both taxable as a receipt and deductible as an expense under the income tax, and the marginal tax rate t is assumed to apply under both the income and consumption tax,' the slopes of the consumer budget constraint under the three alternative regimes are

We develop a general equilibrium tax model to evaluate the impacts of equal yield base broadening in indirect taxes from high rate narrow based (typically manufactures) taxes to broad based taxes (including services) such as a VAT. We capture differences in choice of mode of supply between market goods, such as manufactures, which cannot be supplied other than through the market, and self-suppliable services and informal sector supplied products. Using this formulation, we are able to provide numerical examples of welfare worsening VAT base broadening, which expands the tax base from market based manufactures, in which there are few (or no) non taxed supply possibilities, to all goods and services where such possibilities exist. We show that the usual presumption that there are welfare benefits from equal yield VAT base broadening breaks down once tax induced increases in self supply of previously non taxed goods and services and in informal sector activity (in small scale construction and other areas) are taken into account. Moreover, since untaxed informal sector supply is typically from lower income to higher income households, they gain as comparable informal sector activity is taxed under the base broadening change. We provide a calibrated version of the model, which captures Canadian base broadening accompanying the introduction of the Canadian VAT (GST) in 1990.

This paper reports a set of lifetime tax incidence calculations using a life cycle simulation model for Canada due to Davies (1979a, 1982). A repeatedly stated qualification to annual calculations in the empirical tax incidence literature is that it would be more satisfactory to make calculations on a lifetime basis. Even though it is acknowledged that lifetime tax incidence could well differ from annual, it is widely believed that data and other difficulties make such calculations next to impossible. Indeed, the widespread acceptance of the data problems of lifetime calculations seems also to have inhibited speculation about how lifetime tax incidence might differ from annual. As a result, redistributive tax policy judgments continue to be based on annual incidence calculations in spite of the reservations many have about their usefulness. Our paper is intended to reorient discussion towards lifetime tax incidence by providing some initial null hypotheses about the shape of lifetime tax profiles. Our main finding is that under the standard competitive assumptions common in the incidence literature, lifetime and annual incidence calculations both produce mild progression in tax rates across household deciles (ignoring the bottom decile in the annual calculation). While the income tax is less progressive in lifetime than in annual calculations, other taxes are for the most part less regressive. Also, lifetime incidence calculations are much more robust to alternative shifting assumptions than annual calculations. In the lifetime context, key distributions such as earnings, transfer payments, and consumption are less heavily concentrated in particular percentiles of the population than is true in annual data. As a result, changing the allocative series for any particular tax does not have the large effect on incidence results found in annual calculations.' Each component of the tax system is allocated to households grouped by lifetime income using particular distributive series following a procedure similar to that employed in annual incidence calculations (for example, Richard Musgrave et al., 1974; Joseph Pechman and Benjamin Okner, 1974; Edgar Browning and William Johnson, 1979; W. Irwin Gillespie, 1980). In the process we are able to compare lifetime and annual incidence calculations using the same data set. In both lifetime and annual calculations, we allocate five groups of taxes among households using distributive series which come partly from the 1971 Statistics Canada Survey of Consumer Finances (SCF) and partly from our life cycle simulation model. The SCF data are used to construct synthetic longitudinal lifetime profiles of earnings and transfer payments for a sample of 500 households. The latter are assigned inheritances by simulating patterns of mortality and bequest. These data are then used in the life cycle model to generate lifetime consumption profiles and bequests. The earnings, transfer, and inheritance data, plus the model output provide the distributive series on which alternative incidence calculations are based. While the incidence calculations presented in this paper use Canadian data, results would likely be similar for the United States