The Impact of Direct Taxes on the Cost of Living
Journal of Political Economy
1987
In this paper we define a cost-of-living index including direct taxes. We show its relationship to the traditional index and demonstrate how nonconsumption costs are properly treated. We then define a fixed-weight approximation, a tax and price index (TPI). Using federal, state, local, and social security tax rates for 1967-85, we construct annual TPI series based on household data. We find that inclusion of direct taxes has sizable impacts on the estimated rate of inflation. Partitioning our household sample, we find that recognition of taxes significantly alters inflation rate differentials estimated using consumption prices alone. I.
- DOI
- 10.1086/261485
- Volume
- 95 (4)
- Pages
- 775-796
- Language
- en
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