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Consumption Taxes and Redistribution

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  • Correia, Maria Isabel Horta

Abstract

It is relatively well known that the introduction of consumption taxation as an alternative in the tax code, and as the main source of government revenues, leads to a more efficient tax system. However the conventional wisdom is that the change from the actual tax code, based on taxation of capital and labour income to this consumption-based system, has undesirable distributional consequences. In this work a very simple method is developed to argue that the converse is the most reasonable outcome from that fundamental tax reform. The main difference in relation to the literature comes from the assumed source of household heterogeneity. Additionally it is shown that the inclusion of a tax on consumption allows for redistributive policies with no costs in terms of efficiency.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5280.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5280

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Keywords: consumption taxes; equity; fundamental tax reform; heterogeneous agents;

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References

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  1. Correia, Isabel H., 1999. "On the efficiency and equity trade-off," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(3), pages 581-603, December.
  2. David Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1997. "Simulating U.S. Tax Reform," NBER Working Papers 6248, National Bureau of Economic Research, Inc.
  3. Helpman, Elhanan & Sadka, Efraim, 1982. "Consumption versus Wage Taxation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(2), pages 363-72, May.
  4. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 49-90 National Bureau of Economic Research, Inc.
  5. William M. Gentry & R. Glenn Hubbard, 1997. "Distributional Implications of Introducing a Broad-Based Consumption Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 1-48 National Bureau of Economic Research, Inc.
  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  7. Isabel Horta Correia & Juan Pablo Nicolini & Pedro Teles, 2003. "Optimal Fiscal and Monetary Policy: Equivalence Results," Working Papers, Banco de Portugal, Economics and Research Department w200303, Banco de Portugal, Economics and Research Department.
  8. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
  9. Joel Slemrod & Jon Bakija, 2004. "Taxing Ourselves, 3rd Edition: A Citizen's Guide to the Debate over Taxes," MIT Press Books, The MIT Press, edition 3, volume 1, number 026269302x, December.
  10. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  11. Raquel Fernandez & Richard Rogerson, 1999. "Equity and Resources: An Analysis of Education Finance Systems," NBER Working Papers 7111, National Bureau of Economic Research, Inc.
  12. Santiago Budría & Javier Díaz-Giménez, 2007. "Economic inequality in Spain: the european community household panel dataset," Spanish Economic Review, Springer, Springer, vol. 9(1), pages 1-38, March.
  13. Isabel H. Correia, 1999. "Fiscal rules of income transformation," Economic Theory, Springer, Springer, vol. 13(1), pages 199-205.
  14. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(3), pages 475-503, June.
  15. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
  16. Jorgenson, Dale W & Wilcoxen, Peter J, 1997. "The Long-Run Dynamics of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 126-32, May.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Are consumption taxes more equitable?
    by Economic Logician in Economic Logic on 2010-12-29 16:25:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2014. "Optimal Tax Progressivity: An Analytical Framework," Staff Report, Federal Reserve Bank of Minneapolis 496, Federal Reserve Bank of Minneapolis.
  2. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.
  3. Isabel Horta Correia, 2007. "The Effects on Equity of an Increase in the Value-Added Tax," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  4. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
  5. George Economides & Apostolis Philippopoulos, 2012. "Are User Fees Really Regressive?," CESifo Working Paper Series 3875, CESifo Group Munich.
  6. Fernando Alexandre & Luís Aguiar Conraria & Pedro Bação & Miguel Portela, 2011. "A Poupança em Portugal," GEMF Working Papers 2011-19, GEMF - Faculdade de Economia, Universidade de Coimbra.
  7. Anagnostopoulos, Alexis & Li, Qian, 2013. "Consumption taxes and precautionary savings," Economics Letters, Elsevier, vol. 119(3), pages 238-242.
  8. G. C. Lim & Paul D. McNelis, 2014. "Income Inequality, Trade and Financial Openness," Melbourne Institute Working Paper Series wp2014n07, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  9. Isabel Horta Correia, 2010. "Taxation and Globalization," Working Papers, Banco de Portugal, Economics and Research Department w201020, Banco de Portugal, Economics and Research Department.

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This item is featured on the following reading lists or Wikipedia pages:
  1. Consumption Taxes and Redistribution (AER 2010) in ReplicationWiki
  2. Economic Logic blog

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