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Is a Consumption Tax Equivalent to a Wage Tax?

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  • Laurence S. Seidman

    (University of Delaware)

Abstract

Is a consumption tax equivalent to a wage tax? This article examines this question in a two-period life-cycle model with Cobb-Douglas production and utility functcons. Three taxes are compared: income, wage, and consumption. The article shows how equivalence depends crucially on government debt policy. If the government varies the government-debt/capital-stock ratio so that each tax achieves the same steady-state capital per worker, then the consumption tax is equivalent to the wage tax: The representative individual chooses the same consumption path and attains the same lifetime utility. However, if the government maintains the same debt/capital ratio under the three taxes, then the consumption tax is not equivalent to the wage tax: The consumption tax achieves a higher capital per worker than the income tax, while the wage tax achieves a lower capital per worker, and the representative individual chooses a different consumption path under all three taxes. Economists should therefore indicate the crucial role of government debt policy in any discussion of tax equivalence.

Suggested Citation

  • Laurence S. Seidman, 1990. "Is a Consumption Tax Equivalent to a Wage Tax?," Public Finance Review, , vol. 18(1), pages 65-76, January.
    • Handle: RePEc:sae:pubfin:v:18:y:1990:i:1:p:65-76
    DOI: 10.1177/109114219001800104
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    References listed on IDEAS

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    1. Kotlikoff, Laurence J, 1984. "Taxation and Savings: A Neoclassical Perspective," Journal of Economic Literature, American Economic Association, vol. 22(4), pages 1576-1629, December.
    2. Seidman, Laurence S, 1983. "Taxes in a Life Cycle Growth Model with Bequests and Inheritances," American Economic Review, American Economic Association, vol. 73(3), pages 437-441, June.
    3. Alan J. Auerbach & Laurence J. Kotlikoff, 1983. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 459-498, National Bureau of Economic Research, Inc.
    4. Evans, Owen J, 1983. "Tax Policy, the Interest Elasticity of Saving, and Capital Accumulation: Numerical Analysis of Theoretical Models," American Economic Review, American Economic Association, vol. 73(3), pages 398-410, June.
    5. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-544, September.
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    Cited by:

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    2. Homburg, Stefan, 2010. "Allgemeine Steuerlehre: Kapitel 1. Grundbegriffe der Steuerlehre," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92547, July.

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