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The Choice between Income and Consumption Taxes: A Primer

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  • Auerbach, Alan J.

Abstract

It has now been nearly three decades since the publication of two important volumes that laid out many of the details of how one might implement a progressive consumption tax (Institute for Fiscal Studies, 1978; U.S. Treasury, 1977). Over the years since, many contributions have analyzed the mechanics of the different variants of consumption taxation, the potential efficiency and distributional effects of their adoption, the issues of administration and transition from the current tax system, and the problems relating to certain types of transactions. But much of what we %u201Cknow%u201D is not part of the general policy discussion and there are important issues that the literature has recognized but still not resolved. The aim of this paper is to lay out the key economic issues involved in deciding whether and how to adopt a consumption tax and to discuss what theory and evidence have told us and could tell us about these issues.

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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt9q85f6qz.

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Date of creation: 06 May 2006
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Handle: RePEc:cdl:oplwec:qt9q85f6qz

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References

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  1. Auerbach, Alan J, 1997. "The Future of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 143-46, May.
  2. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," Levine's Working Paper Archive 391749000000000449, David K. Levine.
  3. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  4. Alan A. Auerbach & David F. Bradford, 2001. "Generalized Cash Flow Taxation," NBER Working Papers 8122, National Bureau of Economic Research, Inc.
  5. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
  6. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
  7. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers 04-033, Stanford Institute for Economic Policy Research.
  8. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  9. David F. Bradford, 1998. "Transition to and Tax Rate Flexibility in a Cash-Flow Type Tax," NBER Working Papers 6465, National Bureau of Economic Research, Inc.
  10. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  11. Jeremy I. Bulow & Lawrence H. Summers, 1984. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  12. James M. Poterba, 2004. "Valuing Assets in Retirement Saving Accounts," Working Papers, Center for Retirement Research at Boston College wp2004-11, Center for Retirement Research, revised Apr 2004.
  13. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
  14. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  15. Louis Kaplow, 1995. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  16. Hubbard, R Glenn, 1997. "How Different Are Income and Consumption Taxes?," American Economic Review, American Economic Association, vol. 87(2), pages 138-42, May.
  17. James R. Hines, 2004. "Might Fundamental Tax Reform Increase Criminal Activity?," Economica, London School of Economics and Political Science, vol. 71(283), pages 483-492, 08.
  18. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  19. James Poterba, 2004. "Valuing Assets in Retirement Saving Accounts," NBER Working Papers 10395, National Bureau of Economic Research, Inc.
  20. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Ruud de Mooij & Michael Keen, 2012. "'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times," NBER Chapters, in: Fiscal Policy after the Financial Crisis National Bureau of Economic Research, Inc.
  2. Peichl, Andreas, 2008. "The Benefits of Linking CGE and Microsimulation Models: Evidence from a Flat Tax Analysis," IZA Discussion Papers 3715, Institute for the Study of Labor (IZA).
  3. Peter Birch Sørensen, 2006. "The Theory of Optimal Taxation: What is the Policy Relevance?," EPRU Working Paper Series 06-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. Alan J. Auerbach, 2006. "The Future of Capital Income Taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 27(4), pages 399-420, December.
  5. repec:ese:iserwp:2009-02 is not listed on IDEAS
  6. Louis Kaplow, 2006. "Capital Levies and Transition to a Consumption Tax," NBER Working Papers 12259, National Bureau of Economic Research, Inc.
  7. Christian R. Jaramillo H. & Jorge Tovar, 2007. "Reflexiones Sobre La Teoría Y La Práctica Del Iva En Colombia," DOCUMENTOS CEDE 003425, UNIVERSIDAD DE LOS ANDES-CEDE.
  8. Auerbach, Alan J., 2006. "Tax Reform in the 21st Century," Berkeley Olin Program in Law & Economics, Working Paper Series qt444479wh, Berkeley Olin Program in Law & Economics.

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