CONSUMPTION TAXES IN A LIFE-CYCLE FRAMEWORK - ARE SIN TAXES REGRESSIVE

We construct measures of tax incidence over the life-cycle and compare these measures to traditional measures based on annual data. Annual m easures of the incidence of taxes on consumption goods may differ from life-cycle measures for three reasons. First, annual measures of inco me reflect transitory components which should have smaller effects on consumption than permanent changes in income. Second, income measured in a single period differs from lifetime income due to age-related dif ferences in earnings. Third, consumption of certain items follows life -cycle patterns independent of changes in income. Surprisingly, we fin d that these effects cause little change in the assessment of the inci dence of taxes on cigarettes. For alcohol, we find that a tax on its c onsumption is slightly less regressive when measured with respect to l ifetime income than when measured with respect to annual income.