Working Paper: NBER ID: w27429
Authors: 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.
Keywords: Consumption Taxes; Redistribution; Informality; Developing Countries
JEL Codes: E26; H21; H23; O12; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Effective tax rate of broad consumption tax (H29) | Consumption taxes are progressive (H29) |
| Informal budget share (H61) | Consumption taxes are progressive once informal consumption is accounted for (H29) |
| Uniform consumption taxes (H29) | Higher effective tax rate for higher-income households (H31) |
| Consumption taxes remitted on purchases at modern stores (H25) | Effective tax rate on formal consumption is strongly progressive (H31) |
| Exempting food from taxation has limited marginal progressivity gains (H29) | Cannot be justified on equity grounds in low-income countries (D63) |