Consumption Smoothing and the Measured Regressivity of Consumption Taxes

FRB Richmond Economic Quarterly, Vol. 95, No. 1, Winter 2009, pp. 75-100

26 Pages Posted: 13 Dec 2012

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Devin Reilly

University of Pennsylvania - Department of Economics

Date Written: 2009

Abstract

In this article, we address two questions. First, how will a move to pure consumption taxation matter for aggregate outcomes? Second, how regressive are consumption taxes? We find as follows. First, a move to a consumption tax will increase savings taken into retirement but will not alter either labor supply or consumption variability substantially. Second, we show that regressivity is a measure that is quantitatively sensitive to the frequency of income being used. In particular, we show that when measures of tax incidence are based on annual income, successful consumption smoothing leads to the appearance of high regressivity. Our preferred measure, which is based on lifetime earnings, shows that consumption taxes are proportional taxes.

Suggested Citation

Athreya, Kartik and Reilly, Devin, Consumption Smoothing and the Measured Regressivity of Consumption Taxes (2009). FRB Richmond Economic Quarterly, Vol. 95, No. 1, Winter 2009, pp. 75-100. Available at SSRN: https://ssrn.com/abstract=2188502

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Devin Reilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
20
Abstract Views
431
PlumX Metrics