The Impact of Consumption Taxes on Income Inequality: An International Comparison

Consumption taxes are often considered as the most regressive component of the tax system. However, there are only few estimates, and even fewer international com-parisons, of the redistributive impact of consumption taxes in the literature, due to scarce data on household expenditures. We use household budget and income surveys and microsimulation to provide consistent estimates of the regressivity of consumption taxes for a large panel of countries and years. We propose a new method for imputing household consumption expenditure across countries: this can be applied to any dataset that contains income information and potentially other socio-demographic variables. We stress that using housing rents, when available, to impute household consumption and compute consumption taxes significantly improves the accuracy of the model. We have three results. First, there is a 1 to 2 ratio between the propensities to consume of the top decile (between 50% and 70% of income) and that of the bottom decile (over 100% of income) in every country. Second, consumption taxes produce a significant rise in the Gini coefficient of income inequality (between 0.01 and circa 0.05 points), but of much smaller size than the positive redistribution from direct taxes and trans-fers. Last, cross-country differences in the distributive effect of consumption taxes are mainly explained by different tax rates (from 7% to 30% in our sample), rather than variations in the distribution of consumption, as the propensity to consume declines sharply with income everywhere.