The Role of Selectivity in Consumption Taxation: Should Consumption Taxes be Uniform?

John Creedy

Economic Analysis and Policy, 1993, vol. 23, issue 1, 1-13

Abstract: This paper examines the role of selectivity in a general consumption tax system. The relevant results from the optimal tax literature are briefly reviewed. Examples are given off the role of exemptions in a general equilibrium model in which all the conditions for uniformity are satisfied except that individuals have different tastes. Exemptions are shown to increase the value of social welfare, using a welfare function which displays inequality aversion. Furthermore, the use of exemptions, combined with a higher rate applied to goods which form a larger proportion of expenditure for high income groups, is examined using a simplified tax and transfer system applied to a random sample of individuals. It is found that the exemption of food has the largest effect, but that non-uniformity is a ‘blunt’ redistributive instrument.

Date: 1993
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