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Moving to a Consumption-Based Tax System: A Quantitative Assessment for Brazil

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  • Santos, Marcelo Rodrigues dos
  • Pereira, Thiago Neves

Abstract

Whether the tax system ought to be built around an income or a consumption tax has been a primary -- some would say the primary -- issue in tax policy for many years. Much of the interest in tax policy arises from the widespread belief that taxes on income and savings tend to lower long-run income by retarding the creation and expansion of firms and by discouraging workers and investment. Following this belief, Brazilian's government has proposed a tax reform which, basically, replaces tax on investment and labor with tax on consumption. In this paper, we develop a dynamic general equilibrium model to guide our quantitative assessment of the economic and distributional implications of such tax reform. The model is calibrated in such a way that it matches some selected features of the Brazilian economy. We also use the calibrated model to calculate the deadweight loss of each type of taxation and thus provide some rationality for that rearrangement in the tax system. The main result of the paper is that, even though the tax reform increases the asset accumulation, labor and output of economy, it also raises the welfare inequality as borrowing constrained individuals cannot take advantage of the drop in tax on savings.

Suggested Citation

  • Santos, Marcelo Rodrigues dos & Pereira, Thiago Neves, 2010. "Moving to a Consumption-Based Tax System: A Quantitative Assessment for Brazil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 64(2), June.
  • Handle: RePEc:fgv:epgrbe:v:64:y:2010:i:2:a:1479
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    Cited by:

    1. Pedro Cavalcanti Ferreira & Rafael Parente, 2019. "Social Security Reform, Retirement and Occupational Behavior," 2019 Meeting Papers 208, Society for Economic Dynamics.
    2. M. Ziliotti & D. Benedetti, 2011. "IL CONSUMO COME MISURA DELLA BASE IMPONIBILE. Recenti applicazioni nel sistema tributario italiano," Economics Department Working Papers 2011-EP01, Department of Economics, Parma University (Italy).

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