Informality, Consumption Taxes and Redistribution

89 Pages Posted: 29 Oct 2021

See all articles by Pierre Jean Bachas

Pierre Jean Bachas

World Bank

Lucie Gadenne

University of Warwick

Anders Jensen

Harvard University - Harvard Kennedy School (HKS)

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Date Written: October 27, 2021

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: Budget Surveys, Inequality, Informality, Redistribution, Taxes

Suggested Citation

Bachas, Pierre Jean and Gadenne, Lucie and Jensen, Anders, Informality, Consumption Taxes and Redistribution (October 27, 2021). HKS Working Paper No. RWP21-026, Available at SSRN: https://ssrn.com/abstract=3951329 or http://dx.doi.org/10.2139/ssrn.3951329

Pierre Jean Bachas

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Lucie Gadenne

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Anders Jensen (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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