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Consumption Taxes and Redistribution

Author Info

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

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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. Santiago Budría & Javier Díaz-Giménez, 2007. "Economic inequality in Spain: the european community household panel dataset," Spanish Economic Review, Springer, vol. 9(1), pages 1-38, March.
  2. 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.
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  5. 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.
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  7. 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.
  8. 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.
  9. Correia, Isabel & Nicolini, Juan Pablo & Teles, Pedro, 2003. "Optimal Fiscal and Monetary Policy: Equivalence Results," CEPR Discussion Papers 3730, C.E.P.R. Discussion Papers.
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  12. Correia, Isabel H., 1999. "On the efficiency and equity trade-off," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 581-603, December.
  13. 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 126-32, May.
  14. Helpman, Elhanan & Sadka, Efraim, 1982. "Consumption versus Wage Taxation," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 363-72, May.
  15. Ventura, G., 1997. "Flat Tax Reform: A Quantitative Exploration," UWO Department of Economics Working Papers 9706, University of Western Ontario, Department of Economics.
  16. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-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.
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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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

  1. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Optimal Tax Progressivity: An Analytical Framework," NBER Working Papers 19899, National Bureau of Economic Research, Inc.
  2. G. C. Lim & Paul D. McNelis, 2014. "Income Inequality, Trade and Financial Openness," Melbourne Institute Working Paper Series wp2014n07, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  3. George Economides & Apostolis Philippopoulos, 2012. "Are User Fees Really Regressive?," CESifo Working Paper Series 3875, CESifo Group Munich.
  4. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.
  5. Sarolta Laczo & Raffaele Rossi, 2014. "Time-consistent consumption taxation," Working Papers 67495267, Lancaster University Management School, Economics Department.
  6. Fernando Alexandre & Luís Aguiar Conraria & Pedro Bação & Miguel Portela, 2011. "A Poupança em Portugal," GEMF Working Papers 2011-19, GEMF - Faculdade de Economia, Universidade de Coimbra.
  7. Isabel Horta Correia, 2010. "Taxation and Globalization," Working Papers w201020, Banco de Portugal, Economics and Research Department.
  8. Isabel Horta Correia, 2007. "The Effects on Equity of an Increase in the Value-Added Tax," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  9. Anagnostopoulos, Alexis & Li, Qian, 2013. "Consumption taxes and precautionary savings," Economics Letters, Elsevier, vol. 119(3), pages 238-242.
  10. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.

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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