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Consumption taxes and the efficiency-equity tradeoff

Author

Listed:
  • George Economides

    (Athens University of Economics and Business)

  • Saqib Jafarey

    (City University, UK)

  • Natasha Miaouli

    (Athens University of Economics and Business)

  • Apostolis Philippopoulos

    (Athens University of Economics and Business)

Abstract

We study the aggregate and distributional implications of introducing consumption taxes into a model with income taxes. The setup is a neoclassical growth model, where agents differ in earnings and second-best policy is chosen by a Ramsey government. Our main result is that the introduction of consumption taxes by the Ramsey government increases aggregate efficiency and benefits all income groups, but it also increases inequality in net income. To put it differently, a switch to income taxes reduces inequality, but it also hurts all groups including the poor.

Suggested Citation

  • George Economides & Saqib Jafarey & Natasha Miaouli & Apostolis Philippopoulos, 2013. "Consumption taxes and the efficiency-equity tradeoff," Working Papers 201324, Athens University Of Economics and Business, Department of Economics.
    • Handle: RePEc:aeb:wpaper:2013024:y:2013
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    File URL: https://www.dept.aueb.gr/sites/default/files/econ/dokimia/AllDP242013.pdf
    File Function: Released version, 2013
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    More about this item

    Keywords

    Ramsey taxation; efficiency; inequality.;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D6 - Microeconomics - - Welfare Economics

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