Lifetime Incidence and the Distributional Burden of Excise Taxes

Lifetime income is less variable than annual household income, since the latter reflects transitory shocks to wages, family status, and employment. This implies that lowincome households in one year have some chance of being higherincome households in other years, and significantly affects the estimated distributional burden of excise taxes. This paper shows that household expenditures on gasoline, alcohol, and tobacco as a share of total consumption (a proxy for lifetime income) are much more equally distributed than expenditures as a share of annual income. From a longer-horizon perspective, excise taxes on these goods are much less regressive than standard analyses suggest. I am grateful to Thomas Moehrle and Frank Sammartino for providing me with data from the Consumer Expenditure Survey, to David Cutler for research assistance, and to Roger Gordon, Joseph Pechman, Nancy Rose, and Lawrence Summers for helpful discussions. This research was supported by a grant from the National Science Foundation and is part of the NBER Program in Taxation. Lifetime Incidence and the Distributional Burden of Excise Taxes James M. Poterba* Although theoretical papers have noted the potentially important distinction between annual and lifetime tax burdens, with one exception the lifetime perspective is absent in empirical studies of tax incidence. Calculations based on annual income may provide particularly unreliable guidance on a central tax policy issues of the early 1990s: the incidence of excise taxes. Conventional wisdom holds that these taxes are regressive, falling most heavily on the poorest households. This has long been one of the central objections to proposals for raising excise taxes. Nevertheless, the evidence for this view may depend critically on the time horizon in incidence studies. Pechman (1985, p. 51) writes that "whether regressivity of [sales and excise] taxes with respect to income would remain for accounting periods longer than one year is not known. It seems clear, however, that the regressivity shown at the lowest income levels on the basis of annual figures would be moderated, if not completely eliminated, over the longer period." There is relatively little systematic evidence, however, 2 evaluating this conjecture. The present paper begins by documenting the unsurprising proposition that household income measured over long horizons is less variable than annual household income. This implies that lowincome households in one year have some chance of being higherincome households in other years. Thus, even if the share of income consumed by lowest income groups is higher than that for higherincome groups, excise taxes or taxes on consumption more generally may be less regressive than calculations based on annual income suggest. The second section explores the differences between the annual and lifetime incidence by considering the incidence of excise taxes on gasoline, alcohol, and tobacco. It shows that