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The Effect of Income Shifting on the Efficiency Properties of Consumption-Tax Systems

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  • Clemens Fuest
  • Bernd Huber

Abstract

It is well known that consumption-tax systems have several advantages over existing income-tax systems, such as greater administrative simplicity and intertemporal neutrality. Despite these advantages, proposals to introduce consumption taxes have only had very limited success. This paper discusses possible explanations for the reluctance of governments to switch to consumption taxation. Our analysis focuses on the role of income shifting as a drawback for consumption-tax reform. We consider a model where taxpayers may shift income between the personal and the corporate income-tax base. In this model, a consumption-tax system characterized by intertemporal neutrality and uniform tax rates on personal and corporate income is not second-best efficient.

Suggested Citation

  • Clemens Fuest & Bernd Huber, 2005. "The Effect of Income Shifting on the Efficiency Properties of Consumption-Tax Systems," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(2), pages 139-153, July.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200507)61:2_139:teoiso_2.0.tx_2-e
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    Keywords

    consumption taxation; income shifting; tax policy;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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