Consumption taxes and the efficiency-equity tradeoff

George Economides, Saqib Jafarey, Natasha Miaouli and Apostolis Philippopoulos
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Saqib Jafarey: City University, UK
Apostolis Philippopoulos: Athens University of Economics and Business

No 201324, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: We study the aggregate and distributional implications of introducing consumption taxes into a model with income taxes. The setup is a neoclassical growth model, where agents differ in earnings and second-best policy is chosen by a Ramsey government. Our main result is that the introduction of consumption taxes by the Ramsey government increases aggregate efficiency and benefits all income groups, but it also increases inequality in net income. To put it differently, a switch to income taxes reduces inequality, but it also hurts all groups including the poor.

Keywords: Ramsey taxation; efficiency; inequality. (search for similar items in EconPapers)
JEL-codes: D6 H2 H4 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:aeb:wpaper:2013024:y:2013

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