Is a Consumption Tax Equivalent to a Wage Tax?

Laurence Seidman

Public Finance Review, 1990, vol. 18, issue 1, 65-76

Abstract: Is a consumption tax equivalent to a wage tax? This article examines this question in a two-period life-cycle model with Cobb-Douglas production and utility functcons. Three taxes are compared: income, wage, and consumption. The article shows how equivalence depends crucially on government debt policy. If the government varies the government-debt/capital-stock ratio so that each tax achieves the same steady-state capital per worker, then the consumption tax is equivalent to the wage tax: The representative individual chooses the same consumption path and attains the same lifetime utility. However, if the government maintains the same debt/capital ratio under the three taxes, then the consumption tax is not equivalent to the wage tax: The consumption tax achieves a higher capital per worker than the income tax, while the wage tax achieves a lower capital per worker, and the representative individual chooses a different consumption path under all three taxes. Economists should therefore indicate the crucial role of government debt policy in any discussion of tax equivalence.

Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:18:y:1990:i:1:p:65-76

DOI: 10.1177/109114219001800104

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