The Incidence of a Lifetime Consumption Tax

This paper exploits a sample of probate records matched to lifetime earnings records to estimate the incidence by income class of a lifetime consumption tax. Since bequests made are not taxed by a consumption tax, people with similar lifetime budget constraints making different sized bequests will pay different amounts in tax. Hence, use of the micro data allows us to determine the degree of horizontal inequity a consumption tax engenders. We also demonstrate how a consumption tax will create a welfare loss by distorting the bequest decision and by misallocating resources between human and financial investments.