On the Incidence of Substituting Consumption Taxes for Income Taxes

Abstract

This paper shows that tax reforms involving an increase in consumption taxes and a decrease in income taxes cannot always be designed in a way that protects the welfare of some chosen class of consumer (e.g., low-income households), even if the government is indifferent to the welfare effects on all other consumers. This is contrary to common intuition and claims by some governments.Tax incidence; consumption taxes; income taxes; tax reform.