Welfare implications of switching to consumption taxation
Welfare implications of switching to consumption taxation
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 consumption tax system that maximizes aggregate welfare involves a 4% subsidy on basic consumption goods and a 68% tax on non-basic goods. Such a tax scheme generates 10% higher output in the long run, with a small increase in inequality. Nonetheless, the benchmark with progressive income taxes and mild consumption taxes provides higher welfare on aggregate in the steady state, and even more so if we consider the transition.
Conesa, Juan Carlos
ee9698bc-c247-448b-b3aa-d80be1681021
Li, Bo
966a37e5-b59a-44a1-8ea5-fa137b06df90
Li, Qian
e8950786-8f13-45ac-9a4d-8942268fe32c
Conesa, Juan Carlos
ee9698bc-c247-448b-b3aa-d80be1681021
Li, Bo
966a37e5-b59a-44a1-8ea5-fa137b06df90
Li, Qian
e8950786-8f13-45ac-9a4d-8942268fe32c
Conesa, Juan Carlos, Li, Bo and Li, Qian
(2020)
Welfare implications of switching to consumption taxation.
Journal of Economic Dynamics and Control, 120, [103991].
(doi:10.1016/j.jedc.2020.103991).
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 consumption tax system that maximizes aggregate welfare involves a 4% subsidy on basic consumption goods and a 68% tax on non-basic goods. Such a tax scheme generates 10% higher output in the long run, with a small increase in inequality. Nonetheless, the benchmark with progressive income taxes and mild consumption taxes provides higher welfare on aggregate in the steady state, and even more so if we consider the transition.
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Accepted/In Press date: 18 September 2020
e-pub ahead of print date: 1 October 2020
Identifiers
Local EPrints ID: 470510
URI: http://eprints.soton.ac.uk/id/eprint/470510
ISSN: 0165-1889
PURE UUID: 398a1135-5805-4b3c-a269-ffca79fa5e12
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Date deposited: 12 Oct 2022 16:35
Last modified: 16 Mar 2024 22:11
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Author:
Juan Carlos Conesa
Author:
Bo Li
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