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Taxing consumption in unequal economies

Author

Listed:
  • Patrick Macnamara

    (University of Manchester)

  • Myroslav Pidkuyko

    (Banco de España)

  • Raffaele Rossi

    (University of Birmingham)

Abstract

This paper shows that linear consumption taxes are a powerful tool to implement efficient redistribution. We derive this result in a quantitative life-cycle model that reproduces the distribution of income and wealth in the United States. Optimal policy calls for raising all fiscal revenues from consumption, and providing redistribution via a highly progressive wage tax schedule. Capital income and wealth should not be taxed. This policy reduces inequality and increases productivity, and brings large welfare gains relative to the status quo. Around two-thirds of these gains are due to redistribution. Finally, our reform is also welfare improving in the short-run.

Suggested Citation

  • Patrick Macnamara & Myroslav Pidkuyko & Raffaele Rossi, 2023. "Taxing consumption in unequal economies," Working Papers 2331, Banco de España.
    • Handle: RePEc:bde:wpaper:2331
    DOI: https://doi.org/10.53479/34646
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    optimal policy; inequality; consumption taxation; life-cycle; entrepreneurs;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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