Coase-Sandor Working Paper Series in Law and Economics
Publication Date
2005
Publication Title
Law & Economics Working Papers
Abstract
This paper considers the arguments regarding the choice between an ideal income tax and an ideal consumption tax, focusing on an argument made by Atkinson and Stiglitz regarding neutral taxation of commodities. The argument shows that a properly designed consumption tax is Pareto superior to an income tax: it is more efficient and at least as good at redistribution. The major exception to the Atkinson and Stiglitz result is if individuals with equal wages have different propensities to save. In that event, a consumption tax may no longer be Pareto superior to an income tax. A consumption tax will continue, however, to be more desirable than an income tax. It will be strictly more efficient than an income tax, and under reasonable assumptions, better at redistributing from those who are better off to those who are worse off. This result holds true even if one heavily weights the welfare of the poor.
Number
251
Recommended Citation
David A. Weisbach & Joseph Bankman, "The Superiority of an Ideal Consumption Tax over an Ideal Income Tax" (John M. Olin Program in Law and Economics Working Paper No. 251, 2005).
Additional Information
Chicago Unbound includes both works in progress and final versions of articles. Please be aware that a more recent version of this article may be available on Chicago Unbound, SSRN or elsewhere.