Distributional Implications of Introducing a Broad-Based Consumption Tax / William M. Gentry, R. Glenn Hubbard.

Format:

Book

Author/Creator:

Gentry, William M.

Contributor:

National Bureau of Economic Research.

Hubbard, R. Glenn.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5832.

NBER working paper series no. w5832

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

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.

Notes:

Print version record

November 1996.