Working Paper: CEPR ID: DP5280
Authors: Isabel Horta Correia
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.
Keywords: consumption taxes; equity; fundamental tax reform; heterogeneous agents
JEL Codes: D63; E62; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Switching from a tax system based on capital and labor income to one based on consumption taxation (H31) | Improves equity (D63) |
| Consumption taxes allow for redistributive policies without efficiency losses (H23) | Improves equity (D63) |
| Elimination of income taxes and introduction of a consumption tax (H29) | Improves equity (D63) |
| When the share of public expenditures financed by consumption taxes is sufficiently high (H69) | Improves equity (D63) |
| Introducing deductions in the tax code (H20) | Enhances equity while maintaining efficiency (D61) |
| Deductions in the tax code function similarly to lump-sum transfers (H23) | Enhances equity while maintaining efficiency (D61) |