Distributional Implications of Introducing a Broad-Based Consumption Tax

William Gentry and Robert Hubbard

No 5832, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As a tax base, 'consumption' is sometimes argued to be less fair than 'income' because the benefits of not taxing capital income accrue to high-income households. We argue that, despite the common perception that consumption taxation eliminates all taxes on capital income, consumption and income taxes actually treat similarly much of what is commonly called capital income. Indeed, relative to an income tax, a consumption tax exempts only the tax on the opportunity cost of capital. In contrast to a pure income tax, a consumption tax replaces capital depreciation with capital expensing. This change eliminates the tax on the opportunity cost of capital, but does not change, relative to the income tax, the tax treatment of capital income arising from a risk premium, inframarginal profit, or luck. Because these components of capital income are more heavily skewed toward the top of the distribution of economic well-being, a consumption tax is more progressive than would be estimated under conventional distributional assumptions. We prepare distribution tables and demonstrate that this modification is quantitatively important.

JEL-codes: H2 (search for similar items in EconPapers)
Date: 1996-11
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published as Distributional Implications of Introducing a Broad-Based Consumption Tax , William M. Gentry, R. Glenn Hubbard. in Tax Policy and the Economy, Volume 11 , Poterba. 1997

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Chapter: Distributional Implications of Introducing a Broad-Based Consumption Tax (1997)
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