Taxing Spending

What is a consumption tax? A consumption tax is a tax triggered by spending. In the United States, the most common form of consumption tax is the retail sales tax administered by most states and many local governments. There are also specific consumption taxes called...

Other Broad-Based Consumption Taxes

Chapter 3 reviews broad-based consumption taxes with which the VAT can be compared, especially the retail sales tax (RST). The Profit & Loss (P&L) Account forms the basis for explaining how the tax liabilities under the various variants are computed. The accounting matrix is also used to note the similarities to and differences from a conventional business income tax whose profits are ascertained on the basis of the matching principle. Subsequently, the practical differences between the taxes are discussed, as well as their prevalence around the world. A brief section on the major lessons from worldwide experience with VAT concludes.

The Effect of an Introduction of Retail Sales Tax in China

This paper develops a dynamic equilibrium model of overlapping generations to study the effect of an introduction of a retail sales tax (RST) in China. Total government tax revenue is fixed, consumption-type value-added tax (VAT) is reduced in response to the introduction of RST, and an output tax exists. An introduction of RST accompanied by a decrease in VAT increases capital accumulation and welfare in the steady state. In the transition period, an introduction of RST accompanied by a decrease in VAT increases capital accumulation but decreases the current generation's welfare. Simulations based on the data from China show that introducing an 8 percent RST increases capital accumulation by 0.43 percent in the steady state.

Do Output Contractions Cause Investment in Fiscal Capacity?

This paper shows that an economic slump can induce a government to invest in fiscal capacity. Large negative income shocks stress the revenue-raising capability of narrow tax bases, making an increase in tax base breadth desirable relative to its fixed implementation cost. A broader tax base enables revenue to be raised at lower tax rates, and so lower deadweight loss. The behavior of US state governments during the Great Depression supports the model: states experiencing larger than average negative income shocks were more likely to adopt a retail sales tax than were states experiencing smaller than average income shocks. (JEL E32, E62, H25, H71, N42, N92)