A Price-Based Approach to Distributing Taxes on Business Income

This paper proposes a new approach to distributing taxes on business income based on modeling prices. Current approaches to distributing these taxes rely on explicit incidence assumptions, which amount to implicit assumptions about how prices change in response to policy changes. Modeling prices directly offers several advantages. First, by allowing for a richer specification of the underlying policies, this approach provides more informative comparisons between different potential reforms. Second, and for the same reason, it provides more accurate estimates when a proposal would have important effects on the timing of tax revenues. Third, it provides a natural framework for incorporating the effects of deficits into distribution analysis. The proposed approach can be applied to both the taxation of corporate income under the corporate income tax and the taxation of income from pass-through businesses under the individual income tax.