Consumption Taxes and Income InequalityAn International Perspective with Microsimulation

Julien Blasco (), Elvire Guillaud and Michaël Zemmour ()
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Julien Blasco: THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, INSEE - Institut national de la statistique et des études économiques (INSEE), LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques (Sciences Po) - Sciences Po - Sciences Po
Michaël Zemmour: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques (Sciences Po) - Sciences Po - Sciences Po

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Abstract: Consumption taxes are often considered as the most anti-redistributive componentof the tax system. Yet, very few estimates, and fewer international comparisons of theredistributive impact of consumption taxes exist in the literature, due to scarce dataon household expenditures. We use household budget surveys and microsimulation toprovide consistent estimates of the regressivity of consumption taxes for a large panelof countries and years. We propose a new method for imputing consumption expen-diture across countries, using widely available data on income and socio-demographiccharacteristics of households. We show that including the distribution of housing rents,when data is available, to impute households' consumption greatly improves the pre-diction of the model. Our results are threefold. First, there is a 1 to 2 ratio betweenthe propensity to consume of the top decile (around 50% of their income) and thatof the bottom decile (100% of income). Second, consumption taxes entail a signifi-cant rise in the Gini coefficient of income (between 0.01 and 0.04 point), yet of muchsmaller magnitude than the positive redistribution operated by direct taxes and trans-fers. Third, cross-country differences in the distributive effect of consumption taxes aremainly explained by variations in the tax rate (from 7 to 24% in our sample), ratherthan variations in the distribution of consumption, since everywhere the propensity toconsume declines sharply with income.

Keywords: Indirect taxes; Redistributive Effect; Consumption; Income; Microsimulation; Luxembourg Income Study (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-cmp and nep-pbe
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Working Paper: Consumption Taxes and Income InequalityAn International Perspective with Microsimulation (2020)
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