Taxing consumption in unequal economies

Patrick Macnamara, Myroslav Pidkuyko and Raffaele Rossi
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Raffaele Rossi: University of Birmingham

No 2331, Working Papers from Banco de España

Abstract: This paper shows that linear consumption taxes are a powerful tool to implement efficient redistribution. We derive this result in a quantitative life-cycle model that reproduces the distribution of income and wealth in the United States. Optimal policy calls for raising all fiscal revenues from consumption, and providing redistribution via a highly progressive wage tax schedule. Capital income and wealth should not be taxed. This policy reduces inequality and increases productivity, and brings large welfare gains relative to the status quo. Around two-thirds of these gains are due to redistribution. Finally, our reform is also welfare improving in the short-run.

Keywords: optimal policy; inequality; consumption taxation; life-cycle; entrepreneurs (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2023-10
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 23/Files/dt2331e.pdf First version, October 2023 (application/pdf)

Related works:
Working Paper: Taxing Consumption in Unequal Economies (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2331

DOI: 10.53479/34646

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