By John W. Diamond, George R. Zodrow, James A. Baker III
Best specialists on tax coverage study the complicated matters taken with basic tax reform, together with the relative benefits of income-based and consumption-based taxation.
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Additional resources for Fundamental Tax Reform: Issues, Choices, and Implications
He brieﬂy reviews the theory of the incidence of the corporate income tax, stressing in particular the different ways that tax reforms affect new and existing capital and how these differences may cause the interests of shareholders, who are concerned about both old and new capital, to diverge from those of the rest of the population, which is concerned primarily with the tax treatment of new capital and its effects on saving, investment, labor productivity, and wages. He notes that this differential impact implies shareholders are likely to favor extensive transition rules to protect the value of their existing investments, while the rest of the population would favor immediate implementation without transition rules for efﬁciencyenhancing reforms.
Finally, Edward J. McCaffery of the University of Southern California examines the implications for fundamental reform of the relatively new ﬁeld of behavioral economics. Behavioral economics is about individual decision making, and its general argument is that individuals are not the rational agents commonly depicted in economic models. That is, contrary to the central assumption of rational dynamic optimization models, behavioral economics argues that individuals consistently make mistakes in their decision-making processes.
While the qualitative implications of this analysis are clear—the efﬁciency gains from eliminating capital income taxes are bigger than otherwise estimated—the quantitative implications for other models, such as life-cycle simulation models, are not clear without further efforts at simulation modeling that incorporate different types of imperfect competition. While the results of such further analysis can be known, what is more difﬁcult to know is the extent to which tax policy should take the competitive environment as given.