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Consumption Taxes and Redistribution

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Listed author(s):
  • Correia, Isabel

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
Handle: RePEc:cpr:ceprdp:5280
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Keywords: consumption taxes; equity; fundamental tax reform; heterogeneous agents;

Other versions of this item:

Find related papers by JEL classification:
  • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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  1. 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.
  2. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  3. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, 02.
  4. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
  5. Santiago Budría & Javier Díaz-Giménez, 2007. "Economic inequality in Spain: the european community household panel dataset," Spanish Economic Review, Springer;Spanish Economic Association, vol. 9(1), pages 1-38, March.
  6. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
  7. 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.
  8. Correia, Isabel H., 1999. "On the efficiency and equity trade-off," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 581-603, December.
  9. 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.
  10. Raquel Fernandez & Richard Rogerson, 2003. "Equity and Resources: An Analysis of Education Finance Systems," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 858-897, August.
  11. David E. Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Kent Smetters & Jan Walliser, 1997. "Simulating U.S. tax reform," Working Paper 9712, Federal Reserve Bank of Cleveland.
  12. 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 402-417, June.
  13. 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, July.
  14. 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 126-132, May.
  15. Isabel H. Correia, 1999. "Fiscal rules of income transformation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(1), pages 199-205.
  16. Elhanan Helpman & Efraim Sadka, 1982. "Consumption Versus Wage Taxation," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 363-372.
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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
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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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