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The Superiority of an Ideal Consumption Tax Over an Ideal Income Tax

82 Pages Posted: 27 Jul 2005  

Joseph Bankman

Stanford Law School

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Date Written: August 2005

Abstract

This paper considers the arguments regarding the choice between an ideal income tax and an ideal consumption tax, focusing on an argument made by Atkinson and Stiglitz regarding neutral taxation of commodities. The argument shows that a properly designed consumption tax is Pareto superior to an income tax: it is more efficient and at least as good at redistribution. The major exception to the Atkinson and Stiglitz result is if individuals with equal wages have different propensities to save. In that event, a consumption tax may no longer be Pareto superior to an income tax. A consumption tax will continue, however, to be more desirable than an income tax. It will be strictly more efficient than an income tax, and under reasonable assumptions, better at redistributing from those who are better off to those who are worse off. This result holds true even if one heavily weights the welfare of the poor.

Keywords: taxation, Atkinson and STiglitz, neutral taxation of commodities

Suggested Citation

Bankman, Joseph and Weisbach, David A., The Superiority of an Ideal Consumption Tax Over an Ideal Income Tax (August 2005). Stanford Law and Economics Olin Working Paper No. 310; U Chicago Law & Economics, Olin Working Paper No. 251. Available at SSRN: https://ssrn.com/abstract=758645 or http://dx.doi.org/10.2139/ssrn.758645

Joseph Bankman

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-725-3825 (Phone)
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David Weisbach (Contact Author)

University of Chicago - Law School ( email )

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Chicago, IL 60637
United States
773-702-3342 (Phone)
773-702-0730 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

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