Informality, Consumption Taxes and Redistribution

Jensen, Anders; Bachas, Pierre; Gadenne, Lucie

Informality, Consumption Taxes and Redistribution

Anders Jensen, Pierre Bachas and Lucie Gadenne

No 407, CID Working Papers from Center for International Development at Harvard University

Abstract: Can taxes on consumption redistribute in developing countries? Contrary to consensus, we show that taxing consumption is progressive once we account for informal consumption. Using household expenditure surveys in 32 countries we proxy for informal consumption using the type of store where purchases occur. We find that the budget share spent in informal stores steeply declines with income, so that the effective tax rate of a broad consumption tax rises with income. Our findings imply that the widespread policy of exempting food from taxation cannot be justified on equity grounds in low-income-countries.

Keywords: Budget Surveys; Inequality; Informality; Redistribution; Taxes (search for similar items in EconPapers)
JEL-codes: E26 H21 H23 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-iue, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:cid:wpfacu:407

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