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
Date Written: 2009
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.
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