TY  - JOUR
AU  - Bradford,David F.
TI  - Transition to and Tax Rate Flexibility in a Cash-Flow Type Tax
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6465
PY  - 1998
Y2  - March 1998
UR  - http://www.nber.org/papers/w6465
L1  - http://www.nber.org/papers/w6465.pdf
N1  - Author contact info:
David F. Bradford
Woodrow Wilson School
Princeton University
Princeton, NJ 08544-1013
Tel: 609/258-1856
Fax: 609/258-2809
E-Mail: BRADFORD@PRINCETON.EDU
M1  - published as David F. Bradford. "Transition to and Tax-Rate Flexibility in a Cash-Flow-Type Tax," in James M. Poterba, editor, "Tax Policy and the Economy, Volume 12" MIT Press (1998)

AB  - The difficulty of making a transition from an income-type to a consumption-type tax is often cited as an obstacle to such a change in policy. The problem is the double taxation of 'old savings' or 'old capital.' A person who has accumulated wealth under an income tax will be hit with an extra tax on the consumption financed by that accumulation with a shift to a consumption tax.  Such a transition effect raises issues of equity, political feasibility and efficiency.  In the typical implementation of a consumption tax, the same sorts of transition phenomena associated with a shift from an income tax come from any change in the rate of tax.  Introduction of a consumption tax is the same as raising the rate of consumption tax from zero to whatever positive rate is envisioned for the new system. Consequently, the problem of transition to a consumption tax generalizes to the problem of changing the rate of consumption tax. In this paper I consider the design of rules that render consumption taxes in the family of business cash-flow taxes immune to the incentive and incidence effects of changes in rate of tax.  I show that two relatively simple approaches are available to deal with it: grandfathering the tax rate applicable to a given period's investment or substituting depreciation allowances for the usual expending of investment, coupled with a credit for the equivalent of interest on the undepreciated investment stock. A cost of this approach is its requirement to identify tru depreciation and, in the second case, the real rate of interest.
ER  -