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Taxing Consumption and Other Sins

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  • James R. Hines Jr.

Abstract

Federal and state governments in the United States use income and payroll taxes as their primary tools to collect revenue. Relative to the United States, governments in the rest of the world rely much more heavily on taxing consumption. Heavy American reliance on income rather than consumption taxation has not served the U.S. economy well. The inefficiency associated with taxing the return to capital means that the tax system reduces investment in the United States and distorts intertemporal consumption by Americans. While the economic logic of consumption taxation is compelling even for a closed economy, it is even more powerful for an open economy exposed to the world capital market. Consumption taxes in the form of excises can be designed to help protect the environment and control other externalities. Excise taxes can also serve the function of more closely aligning tax burdens with the benefits that taxpayers receive from certain government services. Understandable concerns arise about the distributional consequences of consumption taxation, but a system that relies heavily on consumption taxes, particularly if accompanied by an income tax, can be as progressive as any income tax the United States would realistically want to adopt.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 21 (2007)
Issue (Month): 1 (Winter)
Pages: 49-68

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Handle: RePEc:aea:jecper:v:21:y:2007:i:1:p:49-68

Note: DOI: 10.1257/jep.21.1.49
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Cited by:
  1. Christian Baker & Jeremy Bejarano & Richard W. Evans & Kenneth L. Judd & Kerk L. Phillips, 2014. "A Big Data Approach to Optimal Sales Taxation," NBER Working Papers 20130, National Bureau of Economic Research, Inc.
  2. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
  3. Laurence Seidman, 2014. "Overcoming The Fiscal Trilemma With Two Progressive Consumption Tax Supplements," Working Papers 14-04, University of Delaware, Department of Economics.
  4. DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.
  5. Kevin Callison & Robert Kaestner, 2014. "Do Higher Tobacco Taxes Reduce Adult Smoking? New Evidence Of The Effect Of Recent Cigarette Tax Increases On Adult Smoking," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 155-172, 01.
  6. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
  7. Bernardi, Luigi, 2009. "Le tasse in Europa dagli anni novanta
    [Taxation in Europe since the Years 1990s]
    ," MPRA Paper 23441, University Library of Munich, Germany.
  8. Laurence Seidman, 2014. "Medicare For All: A Public Finance Analysis," Working Papers 14-02, University of Delaware, Department of Economics.

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