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Welfare implications of switching to consumption taxation

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  • Conesa, Juan Carlos
  • Li, Bo
  • Li, Qian

Abstract

We evaluate a reform of the US tax system switching to consumption taxation instead of income taxation. We do so in an environment that allows for progressivity of consumption taxes through differential tax rates between basic and non-basic consumption goods. The consumption tax system that maximizes aggregate welfare involves a 4% subsidy on basic consumption goods and a 68% tax on non-basic goods. Such a tax scheme generates 10% higher output in the long run, with a small increase in inequality. Nonetheless, the benchmark with progressive income taxes and mild consumption taxes provides higher welfare on aggregate in the steady state, and even more so if we consider the transition.

Suggested Citation

  • Conesa, Juan Carlos & Li, Bo & Li, Qian, 2020. "Welfare implications of switching to consumption taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
  • Handle: RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301597
    DOI: 10.1016/j.jedc.2020.103991
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Welfare Implications of Switching to Consumption Taxation
      by Christian Zimmermann in NEP-DGE blog on 2018-10-14 03:03:10

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    More about this item

    Keywords

    Incomplete markets; Heterogeneous agents; Consumption tax; Differential consumption; Transitional dynamics;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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