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Informality, Consumption Taxes and Redistribution

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  • Pierre Bachas
  • Lucie Gadenne
  • Anders Jensen

Abstract

Can taxes on consumption redistribute in developing countries? Contrary to consensus, we show that taxing consumption is progressive once we account for informal consumption. Using household expenditure surveys in 32 countries we proxy for informal consumption using the type of store where purchases occur. We find that the budget share spent in informal stores steeply declines with income, so that the effective tax rate of a broad consumption tax rises with income. Our findings imply that the widespread policy of exempting food from taxation cannot be justified on equity grounds in low-income-countries.

Suggested Citation

  • Pierre Bachas & Lucie Gadenne & Anders Jensen, 2020. "Informality, Consumption Taxes and Redistribution," NBER Working Papers 27429, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27429
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    13. Doligalski, Paweł & Rojas, Luis E., 2023. "Optimal redistribution with a shadow economy," Theoretical Economics, Econometric Society, vol. 18(2), May.
    14. Nora Lustig & Valentina Martinez Pabon, 2022. "Universal Basic Income, Taxes, and the Poor," Working Papers 2205, Tulane University, Department of Economics.
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    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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