American Economic Review: Vol. 100 No. 4 (September 2010)


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Consumption Taxes and Redistribution

Article Citation

Correia, Isabel. 2010. "Consumption Taxes and Redistribution." American Economic Review, 100(4): 1673-94.

DOI: 10.1257/aer.100.4.1673


This study considers replacing the current US tax system with only a flat tax consumption tax, showing, in contrast to the literature, that such a reform leads to a decline in inequality and increase in welfare for the welfare-poor. The results are obtained from a simple model that identifies the main channels through which the reform affects the economy. It is shown also that these novel results depend on the distribution of wealth and earnings, and that they hold for the relevant empirical distributions. (JEL D31, H23, H25)

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Correia, Isabel (Bank of Portugal)

JEL Classifications

D31: Personal Income, Wealth, and Their Distributions
H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H25: Business Taxes and Subsidies including sales and value-added (VAT)

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