Informality, Consumption Taxes and Redistribution
Can consumption taxes reduce inequality in developing countries? This paper combines household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. It uses the pla...
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World Bank, Washington, DC
2020
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| Online Access: | http://documents.worldbank.org/curated/en/914891591031975251/Informality-Consumption-Taxes-and-Redistribution http://hdl.handle.net/10986/33851 |
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okr-10986-338512022-09-20T00:10:57Z Informality, Consumption Taxes and Redistribution Bachas, Pierre Gadenne, Lucie Jensen, Anders CONSUMPTION TAX INFORMAL SECTOR TAXATION INCOME DISTRIBUTION INEQUALITY INFORMALITY REDISTRIBUTION HOUSEHOLD SURVEYS HOUSEHOLD CONSUMPTION Can consumption taxes reduce inequality in developing countries? This paper combines household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. It uses the place of purchase of each expenditure to proxy for informal (untaxed) consumption which enables characterizing the informality Engel curve. The analysis finds that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. The paper extends the standard optimal commodity tax model to allow for informal consumption and calibrates it to the data to study the effects of different tax policies on inequality. Contrary to consensus, the findings show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. These effects are primarily driven by the shape of the informality Engel curve. Taking informality into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries. 2020-06-04T14:36:40Z 2020-06-04T14:36:40Z 2020-06 Working Paper http://documents.worldbank.org/curated/en/914891591031975251/Informality-Consumption-Taxes-and-Redistribution http://hdl.handle.net/10986/33851 English Policy Research Working Paper;No. 9267 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
CONSUMPTION TAX INFORMAL SECTOR TAXATION INCOME DISTRIBUTION INEQUALITY INFORMALITY REDISTRIBUTION HOUSEHOLD SURVEYS HOUSEHOLD CONSUMPTION |
| spellingShingle |
CONSUMPTION TAX INFORMAL SECTOR TAXATION INCOME DISTRIBUTION INEQUALITY INFORMALITY REDISTRIBUTION HOUSEHOLD SURVEYS HOUSEHOLD CONSUMPTION Bachas, Pierre Gadenne, Lucie Jensen, Anders Informality, Consumption Taxes and Redistribution |
| relation |
Policy Research Working Paper;No. 9267 |
| description |
Can consumption taxes reduce inequality
in developing countries? This paper combines household
expenditure data from 31 countries with theory to shed new
light on the redistributive potential and optimal design of
consumption taxes. It uses the place of purchase of each
expenditure to proxy for informal (untaxed) consumption
which enables characterizing the informality Engel curve.
The analysis finds that the budget share spent in the
informal sector steeply declines with income, in all
countries. The informal sector thus makes consumption taxes
progressive: households in the richest quintile face an
effective tax rate that is twice that of the poorest
quintile. The paper extends the standard optimal commodity
tax model to allow for informal consumption and calibrates
it to the data to study the effects of different tax
policies on inequality. Contrary to consensus, the findings
show that consumption taxes are redistributive, lowering
inequality by as much as personal income taxes. These
effects are primarily driven by the shape of the informality
Engel curve. Taking informality into account, commonly used
redistributive policies, such as reduced tax rates on
necessities, have a limited impact on inequality. In
particular, subsidizing food cannot be justified on equity
or efficiency grounds in several poor countries. |
| format |
Working Paper |
| author |
Bachas, Pierre Gadenne, Lucie Jensen, Anders |
| author_facet |
Bachas, Pierre Gadenne, Lucie Jensen, Anders |
| author_sort |
Bachas, Pierre |
| title |
Informality, Consumption Taxes and Redistribution |
| title_short |
Informality, Consumption Taxes and Redistribution |
| title_full |
Informality, Consumption Taxes and Redistribution |
| title_fullStr |
Informality, Consumption Taxes and Redistribution |
| title_full_unstemmed |
Informality, Consumption Taxes and Redistribution |
| title_sort |
informality, consumption taxes and redistribution |
| publisher |
World Bank, Washington, DC |
| publishDate |
2020 |
| url |
http://documents.worldbank.org/curated/en/914891591031975251/Informality-Consumption-Taxes-and-Redistribution http://hdl.handle.net/10986/33851 |
| _version_ |
1764479657402433536 |