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Welfare Implications of Switching to Consumption Taxation

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  • Juan Carlos Conesa
  • Bo Li
  • Qian Li

Abstract

We evaluate a reform of the US tax system switching to consumption taxation instead of income taxation. We do so in an environment that allows for progressivity of consumption taxes through differential tax rates between basic and non-basic consumption goods. The optimal tax system involves substantial subsidies to the consumption of basic goods. We find large efficiency gains in the long run, with a very small increase in inequality. However, once we consider the transitional dynamics associated to the reform, only very low productivity households and a handful of high productivity low wealth households experience welfare gains.

Suggested Citation

  • Juan Carlos Conesa & Bo Li & Qian Li, 2018. "Welfare Implications of Switching to Consumption Taxation," Department of Economics Working Papers 18-09, Stony Brook University, Department of Economics.
  • Handle: RePEc:nys:sunysb:18-09
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    References listed on IDEAS

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    7. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
    8. Conesa, Juan Carlos & Costa, Daniela & Kamali, Parisa & Kehoe, Timothy J. & Nygard, Vegard & Raveendranathan, Gajen & Saxena, Akshar, 2017. "Macroeconomic Effects of Medicare," Staff Report 548, Federal Reserve Bank of Minneapolis.
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    11. 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.
    12. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, May.
    13. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
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    1. Welfare Implications of Switching to Consumption Taxation
      by Christian Zimmermann in NEP-DGE blog on 2018-10-14 03:03:10

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