The Effects of Tax Reform on Prices and Asset Values

All forms of consumption taxes have the same basic, desirable effect on the economy—they eliminate the distortion present in an income tax between current and future consumption. But different ways of administering consumption taxes have different effects in the long run and especially during the transition. Sales taxes and value-added taxes require a one-time increase in the price level, a shock that the Hall-Rabushka and personal consumption taxes avoid. The basis value-added tax (VAT) requires a one-time appreciation of the dollar, a shock that other consumption taxes avoid. Generally, consumption taxes would impose a new tax on the rental value of owner-occupied housing, which might have a small adverse net effect on housing. This effect could be offset by a personal housing deduction. The present paper also discusses effects on interest rates, bonds, equities, human capital, and retirement saving.