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Informality, consumption taxes and redistribution
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Bachas, Pierre, Gadenne, Lucie and Jensen, Anders (2020) Informality, consumption taxes and redistribution. Working Paper. Coventry, UK: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1277). (Unpublished)
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Official URL: https://warwick.ac.uk/fac/soc/economics/research/w...
Abstract
Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||||||||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance H Social Sciences > HM Sociology T Technology > TX Home economics |
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| Divisions: | Faculty of Social Sciences > Economics | ||||||||||||
| Library of Congress Subject Headings (LCSH): | Home economics -- Accounting , Equality, Taxation, Consumption (Economics) , Taxation of articles of consumption | ||||||||||||
| Series Name: | Warwick economics research papers series (WERPS) | ||||||||||||
| Publisher: | University of Warwick. Department of Economics | ||||||||||||
| Place of Publication: | Coventry, UK | ||||||||||||
| ISSN: | 0083-7350 | ||||||||||||
| Official Date: | 9 July 2020 | ||||||||||||
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| Number: | 1277 | ||||||||||||
| Institution: | University of Warwick | ||||||||||||
| Status: | Not Peer Reviewed | ||||||||||||
| Publication Status: | Unpublished | ||||||||||||
| Access rights to Published version: | Open Access | ||||||||||||
| Description: | This paper also appears as CAGE Discussion Paper No. 487 |
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| RIOXX Funder/Project Grant: |
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