consumption taxation model

Extracted Attributes

• Field

  Optimal Tax Theory

• Mechanism

  Can be indirect (sales tax, value-added tax) or direct (e.g., Hall–Rabushka flat tax)

• Primary Focus

  Taxation of consumption spending on goods and services

• Economic Impact

  Encourages saving and investment by shifting tax collection from when money is earned to when money is spent

• Potential Issue

  Can be regressive if poorly designed, as high-earners tend to consume proportionally less of their income

• Theoretical Goal

  Minimize economic distortions, ideally with one standard rate on all final consumption and few exemptions

• Subsequent Research

  Explored assumptions for zero-tax result and presented arguments for a positive optimal capital income tax

• Reason for Zero Tax Theory

  Taxing capital income is viewed as a differentiated consumption tax on present versus future consumption, distorting saving and consumption behavior

• Associated Policy Tool (Discussion)

  Tariffs (as a potential component of a shift towards this model)

• Key Theoretical Result (Historical)

  Optimal capital income tax is zero (Atkinson–Stiglitz theorem, Chamley–Judd result)

Timeline

• The Atkinson–Stiglitz theorem postulates the optimality of zero capital income tax. (Source: Wikipedia)

  1976

• The Chamley–Judd zero capital income tax result is postulated. (Source: Wikipedia)

  1985/1986

• Tariffs are discussed on the All-In Podcast by David Friedberg as a potential component of a shift towards a consumption taxation model under the Donald Trump administration, aiming to promote onshoring. (Source: related_documents)

  Undated

Optimal capital income taxation

Optimal capital income taxation is a subarea of optimal tax theory which studies the design of taxes on capital income such that a given economic criterion like utility is optimized. Some have theorized that the optimal capital income tax is zero. Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavior as individuals substitute the more heavily taxed future consumption with current consumption. Due to these distortions, zero taxation of capital income might be optimal, a result postulated by the Atkinson–Stiglitz theorem (1976) and the Chamley–Judd zero capital income tax result (1985/1986). Subsequent work on optimal capital income taxation has elucidated the assumptions underlying the theoretical optimality of a zero capital income tax. Additionally, diverse arguments for a positive optimal capital income tax have been advanced.

Web Search Results

• [PDF] The Transition to Consumption Taxation, Part 1

  COMPARISON OF INCOME AND CONSUMPTION TAXES I use a simple economic model to com-pare income and consumption taxes. I assume that there is no risk or uncertainty and that the economy is closed to international trade and investment. Gross output is produced from labor and capital in accordance with a production function that may vary over time, F (Kt,Lt,t). Since output and income are identical in this closed economy, I use the terms inter-changeably. [...] A well-established principle of public finance states that in a stylized model of this type, it makes no difference whether taxes are collected from buyers or from sellers. It is sim-plest to assume that a single firm carries out all production and that the income tax is collected from this firm. If τy,t is the income tax rate at time t, the firm’s tax liability is (3) Tt = τy,t[F (Kt,Lt,t ) – δKt]. [...] One way to describe this treatment is that the production of consumer and government capital is treated as if it were consumption and the actual consumption subsequently produced by this capital is ignored. Any “consumption” tax that taxes investment as if it were consump-tion and exempts the output produced by capi-tal is simply a wage tax; only wages remain if business cash flow (capital income minus investment) is removed from the consumption tax base.

• US Consumption Tax vs Income Tax Reform: Details & Analysis

  The first consumption tax reform we model implements a value-added tax and rebate to replace the corporate income tax and child tax credit, earned income tax credit, and child and dependent care tax credit.(#_ftn74) [...] We begin with background on consumption taxes and how they can be structured followed by a review of studies and international examples of consumption taxes. We then turn to an overview of the current U.S. tax system and model two tax reform options. [...] Table 3 outlines four approaches to consumption taxes: the retail sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

• Consumption tax - Wikipedia

  Wikipedia # Consumption tax A consumption tax is a tax levied on consumption spending on goods and services. The tax base of such a tax is the money spent on consumption "Consumption (economics)"). Consumption taxes are usually indirect, such as a sales tax or a value-added tax. However, a consumption tax can also be structured as a form of direct, personal taxation, such as the Hall–Rabushka flat tax. ## Contents ## Types ### Value-added tax [...] Many proposed consumption taxes share some features with income tax systems. Under these proposals, taxpayers are typically given exemptions and/or a standard deduction in order to ensure that the poor do not pay any tax. In a flat consumption tax, these other deductions are not permitted. [...] Flat consumption taxes are regressive (shift the tax burden to the less well-off). The ratio of tax obligation to income tends to shrink as income increases because high-earners tend to consume proportionally less of their income. An individual unable to save will pay taxes on all his income, but an individual who saves or invests a portion of his income is taxed only on the remaining income. ## Practical considerations

• Consumption Tax | TaxEDU Glossary

  A consumption tax system would shift the time of collection from when money is earned to when money is spent. To minimize economic distortions, there is ideally only one standard rate that is levied on all final consumption, with as few exemptions as possible. [...] # Consumption Tax A consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or income taxes where all savings are tax-deductible. ## A Tax on Spending [...] While sales taxes can be regressive when poorly designed, consumption taxes, as a whole, do not need to be. Consumption taxes, in theory, would encourage saving and investment, whereas income taxation discourages this behavior because it taxes both consumption and savings.

• Consumption Tax: What It Is And How It Works - Bankrate

  A consumption tax is levied on the sale of a good or service. While consumption taxes come in several different forms, they generally apply at the time of purchase. ## How consumption taxes work Consumption taxes are a tax on how people or businesses spend their money. These taxes on the purchase of goods and services are usually percentage-based, meaning they apply as a percentage of the total purchase price.