TY - JOUR AU - Gentry,William M. AU - Hubbard,R. Glenn TI - Distributional Implications of Introducing a Broad-Based Consumption Tax JF - National Bureau of Economic Research Working Paper Series VL - No. 5832 PY - 1997 Y2 - October 1997 UR - http://www.nber.org/papers/w5832 L1 - http://www.nber.org/papers/w5832.pdf N1 - Author contact info: William M. Gentry Department of Economics Williams College Morey House Williamstown, MA 01267 Tel: 413-597-4257 Fax: 413-597-4045 E-Mail: William.M.Gentry@williams.edu R. Glenn Hubbard Graduate School of Business Columbia University, 101 Uris Hall 3022 Broadway New York, NY 10027 Tel: 212/854-3493 Fax: 212/864-6184 E-Mail: rgh1@columbia.edu, ws2187@columbia.edu M1 - published as William M. Gentry, R. Glenn Hubbard. "Distributional Implications of Introducing a Broad-Based Consumption Tax," in James M. Poterba, editor, "Tax Policy and the Economy, Volume 11" MIT Press (1997) M2 - featured in NBER digest on 1997-07-01 AB - 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. ER -