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Fragility in modeling consumption tax revenue

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  • Kazuki Hiraga
  • Kengo Nutahara

Abstract

This study shows that the shape of the tax revenue curve for consumption tax and its boundedness are sensitive to (i) the functional form of utility and (ii) the use of tax revenue in a neoclassical general equilibrium model. The tax revenue curve for consumption tax cannot be hump-shaped if the utility function is King- Plosser-Rebelo utility with constant labor supply elasticity. Conversely, the curve can be hump-shaped if the utility function is additively separable in consumption and labor supply or if the utility function is Greenwood-Hercowitz-Huffman, both of which are popular in the literature. The use of tax revenue also has significant effects on the tax revenue curve for consumption tax. If the tax revenue is mainly used as a lump-sum transfer to households, Then the tax revenue is likely to be unbounded, whereas it is likely to be bounded and the tax revenue curve is likely to be hump-shaped if the tax revenue is mainly used as government consumption.

Suggested Citation

  • Kazuki Hiraga & Kengo Nutahara, 2019. "Fragility in modeling consumption tax revenue," CIGS Working Paper Series 19-003E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:19-003e
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    Cited by:

    1. Kazuki Hiraga & Kengo Nutahara, 2022. "Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 78(3), pages 342-361.
    2. Blum, Bianca & Franke, Marcel & Malmberg, Elina & Neumärker, Bernhard & Weinel, Jette, 2023. "The New Ordoliberalism: A case for UBI?," The Constitutional Economics Network Working Papers 01-2023, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    3. Neumärker, Bernhard & Weinel, Jette Leonie, 2024. "The implications of UBI on the utility function and tax revenue: Further calibrating of basic income effects," FRIBIS Discussion Paper Series 02-2024, University of Freiburg, Freiburg Institute for Basic Income Studies (FRIBIS).

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