Alan D. Viard argues that switching from the current income tax to a consumption tax would cause only modest declines in the prices of stocks and owner-occupied homes. In the published version of his comments on a paper presented by John Diamond and George Zodrow at a 2006 conference, Viard notes that their results refute common claims of large price declines. He observes, though, that the transition to a new tax system raises a number of complex issues.

Resident Scholar Alan D. Viard

The authors' model has the crucial building blocks required to examine the change in the market value of existing capital and the resulting impact on the aggregate utility of different cohorts; a general equilibrium methodology, rational expectations, a careful representation of the current tax system's key features, and separate analysis of owner-occupied housing and business capital. The last element is important because the two types of capital are affected differently by tax reform and because changes in their values have different political and distributional implications. The authors take an additional step forward by separating rental housing from other business capital, permitting recognition of the close substitutability between rental and owner-occupied housing.

Because the model is stylized, it is unavoidably restrictive along some dimensions. For example, it features perfect competition and exogenous debt-equity and payout ratios; it does not include uncertainty, heterogeneity within cohorts, or human capital. All of these simplifications seem acceptable for the purpose at hand. The closed-economy assumption is a little more troubling because it may rule out some important transitional effects. But, it is not easy to formulate an adequate alternative, given the formidable difficulties of modeling current international tax rules. . . .

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Alan D. Viard is a resident scholar at AEI.