Indirect Taxation and Progressivity: Revenue and Welfare Changes
When debating an existing or proposed indirect tax, particular emphasis is often given to the disproportional effect of the tax. This effect is intended to show how the welfare loss from the tax is distributed across households with various income levels. Typically, the disproportional effect is assessed using a tax-revenue-based measure that computes how the amount of tax paid, expressed as a fraction of household expenditure, varies as household expenditure increases. However, the amount of tax paid by a household does not always form a good measure of the welfare loss experienced by the household. Hence a more appropriate assessment of the disproportional effect of a tax is a welfare-based measure that computes the variation in the welfare loss (from the tax) as a fraction of household expenditure, as household expenditure increases. This paper shows that when the households' preferences, in respect to their choice of goods, are allowed to vary among households, tax revenues provide a poor measure of disproportionality, producing results that directly conflict with those produced from a welfarebased measure. The New Zealand indirect tax system is used to show that such cases of conflict are frequent, reinforcing the importance of using a welfare-based measure when assessing the disproportional effects of an indirect tax.
Volume (Year): 62 (2006)
Issue (Month): 1 (March)
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References listed on IDEAS
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- John Creedy, 1998. "Measuring Welfare Changes and Tax Burdens," Books, Edward Elgar Publishing, number 1579.
- John Creedy & Cath Sleeman, 2005.
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- Creedy, John, 1998. "Measuring the Welfare Effects of Price Changes: A Convenient Parametric Approach," Australian Economic Papers, Wiley Blackwell, vol. 37(2), pages 137-151, June.
- Creedy, J., 1996. "Measuring the Welfare Effects of Price Changes: A Convenient Parametric Approach," Department of Economics - Working Papers Series 536, The University of Melbourne.
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- R. A. Musgrave & Tun Thin, 1948. "Income Tax Progression, 1929-48," Journal of Political Economy, University of Chicago Press, vol. 56, pages 498-498.
- John Creedy & Norman Gemmell, 2004. "The Built-In Flexibility Of Income And Consumption Taxes In New Zealand," Australian Economic Papers, Wiley Blackwell, vol. 43(4), pages 459-474, December.
- John Creedy & Norman Gemmell, 2003. "The Built-in Flexibility of Income and Consumption Taxes in New Zealand," Treasury Working Paper Series 03/05, New Zealand Treasury.
- Muellbauer, John, 1974. "Prices and Inequality: The United Kingdom Experience," Economic Journal, Royal Economic Society, vol. 84(333), pages 32-55, March. Full references (including those not matched with items on IDEAS)
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