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Implementing direct consumption taxes in developing countries

Author

Listed:
  • Zodrow, George R.
  • McLure, Charles E. Jr.

Abstract

This report examines the possibility of using a direct tax on consumption as a replacement for an existing income tax within the context of a developing country. The structural differences between income and consumption taxes are described, and some simple examples are used to illustrate the basic differences in the taxation of businesses and individuals under the two approaches. The report includesa brief survey of the extensive literature on the choice between income and consumption as the basis for a system of direct taxation. After a detailed discussion of the choice between cash flow and tax prepayment treatment at the individual level under a direct consumption tax, the analysis concludes that for simplicity reasons the individual tax prepayment approach is the more appropriate one in the developing country context. The report then describes the structure and implementation of such a direct consumption tax. The discussion includes an examination of international and transitional issues, and also comments on the desirability and feasibility of supplementary wealth taxes and taxation on a presumptive basis.

Suggested Citation

  • Zodrow, George R. & McLure, Charles E. Jr., 1988. "Implementing direct consumption taxes in developing countries," Policy Research Working Paper Series 131, The World Bank.
    • Handle: RePEc:wbk:wbrwps:131
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    Citations

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    Cited by:

    1. Kramer, Frank, 2009. "Symmetric cash flow-taxation and cross-border investments," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2009-03, University of Bayreuth, Chair of Finance and Banking.
    2. David F. Bradford, 1998. "Transition to and Tax-Rate Flexibility in a Cash-Flow-Type Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 151-172, National Bureau of Economic Research, Inc.
    3. Sally Wallace, 2010. "Can Georgia Move from Income Tax to Consumption Tax?," Chapters, in: Sally Wallace (ed.), State and Local Fiscal Policy, chapter 7, Edward Elgar Publishing.
    4. George Zodrow, 2006. "Capital Mobility and Source-Based Taxation of Capital Income in Small Open Economies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(2), pages 269-294, May.
    5. George R. Zodrow, 2010. "International Taxation and Company Tax Policy in Small Open Economies," Chapters, in: Iris Claus & Norman Gemmell & Michelle Harding & David White (ed.), Tax Reform in Open Economies, chapter 6, Edward Elgar Publishing.
    6. Roy Bahl & Sally Wallace, 2007. "From Income Tax to Consumption Tax?. The Case of Jamaica," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(3), pages 396-414, September.

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