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Consumption smoothing and the measured regressivity of consumption taxes

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  • Kartik B. Athreya
  • Devin Reilly

Abstract

In this article, we address two questions. First, how will a move to pure consumption taxation matter for aggregate outcomes? Second, how regressive are consumption taxes? We find as follows. First, a move to a consumption tax will increase savings taken into retirement but will not alter either labor supply or consumption variability substantially. Second, we show that regressivity is a measure that is quantitatively sensitive to the frequency of income being used. In particular, we show that when measures of tax incidence are based on annual income, successful consumption smoothing leads to the appearance of high regressivity. Our preferred measure, which is based on lifetime earnings, shows that consumption taxes are proportional taxes.

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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2009)
Issue (Month): Win ()
Pages: 75-100

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Handle: RePEc:fip:fedreq:y:2009:i:win:p:75-100:n:v.95no.1

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Keywords: Taxation ; Consumption (Economics);

References

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Cited by:
  1. Athreya, Kartik & Reilly, Devin & Simpson, Nicole B., 2014. "Single Mothers and the Earned Income Tax Credit: Insurance Without Disincentives?," IZA Discussion Papers 8114, Institute for the Study of Labor (IZA).
  2. Artheya, Kartik & Reilly, Devin & Simpson, Nicole B., 2014. "Young Unskilled Women and the Earned Income Tax Credit: Insurance Without Disincentives?," Working Paper 14-11, Federal Reserve Bank of Richmond, revised 01 Jun 2014.

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