Tax Equivalences and their Implications
In economic analyses of the effects of tax policies, one commonly encounters discussions of the equivalence of apparently different policies, where equivalence is defined as the policies having the same impact on fundamental economic outcomes. These related tax policies may differ in many respects, which give rise to conditions under which the equivalences may break down.
This paper draws out the key issues that relate to tax equivalences, using several illustrations from important instances of such equivalences that span different areas of taxation, with many of these illustrations relating to the taxation of capital income. Recognition of equivalences and the ways in which they may fail to hold is important both for positive analysis (e.g., the political reasons for choosing one approach over another) and for normative analysis (to determine which approach may be a more effective way of implementing a policy).
This paper was presented at the 2018 NBER Tax Policy and the Economy Conference, Washington, DC, September 27, 2018. I am grateful to Bill Gale, Louis Kaplow, Robert Moffitt, Emmanuel Saez, Danny Yagan, and conference participants for comments on earlier drafts. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.