NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Distributional Implications of Introducing a Broad-Based Consumption Tax

William M. Gentry, R. Glenn Hubbard

NBER Working Paper No. 5832 (Also Reprint No. r2153)
Issued in November 1996
NBER Program(s):   PE

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.

download in pdf format
   (2509 K)

email paper

An NBER digest for this paper is available.

A non-technical summary of this paper is available in the NBER Bulletin on Aging and Health. You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (2509 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5832

Published: 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

Users who downloaded this paper also downloaded these:
Gentry and Hubbard Distributional Implications of Introducing a Broad-Based Consumption Tax
Fullerton, Shoven, and Whalley w0892 Replacing the U.S. Income Tax with a Progressive Consumption Tax: A Sequenced General Equilibrium Approach
Feenberg, Mitrusi, and Poterba w5885 Distributional Effects of Adopting a National Retail Sales Tax
Auerbach w12307 The Choice Between Income and Consumption Taxes: A Primer
Auerbach w11686 Who Bears the Corporate Tax? A review of What We Know
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us