A New Way of lifetime income taxation: lifetime income tax credit

Abstract

We propose a new way to lifetime income taxation, and present simulation results on the effects of the proposed tax reform. Our proposal is to introduce a new tax credit in estate tax, the amount of which sets equal taxpayers` income tax payments during their lifetime. Integration of income tax and estate tax system in this way would make taxpayers` lifetime tax burden more in line with lifetime income and less dependent on fluctuating annual income. The provision of lifetime income tax credit (hereafter, LITC) can be seen as a new, practicable way of Vickrey taxation, being simpler and more implementable. LITC improves the horizontal equity and efficiency. The simulation results, using a general equilibrium overlapping generational model, show that LITC improves the tax compliance considerably, leading to lower effective tax rates, which improves the efficiency significantly. GDP, labor, consumption, wealth, and welfare increase considerably.