On the Taxation of Life Income

Abstract

Progressive income tax systems penalize incomes that fluctuate from year to year. Legislation, both in the United States and in Canada, has provided for some relief through limited averaging provisions. This paper explores the properties of a tax system that bases its levy on the income earned over the taxpayers' entire life. The complications caused by errors in the outcome estimates, inflation, variations in interest rates, property income, capital market imperfections, and rate changes are discussed. Potential improvements through the successful implementation of a life income tax system include the equal treatment of equals, the possible inclusion of real capital gains in the tax base, and the neutral treatment of human and physical capital.

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