In/Stability under Ideal Income Tax and Ideal Consumption Tax
- Gerasimos T. Soldatos , American University of Athens, Emeritus
Progressive income tax; progressive consumption tax; multiplier-accelerator model; balanced- budget rule ,
This article compares the stabilization properties of a comprehensive income tax and a broad-based consumption tax within a typical multiplier-accelerator model of the business cycle. It is found that: (i) a progressive consumption tax is more stabilizing than a progressive income tax in the absence of a budget rule, (ii) the income tax is as stabilizing in the presence of such a rule as consumption tax is in its absence, (iii) under reasonable tax rates, both taxes are equally stabilizing under a balance-budget rule, (iv) both at an output cost relative to the case in which there is no such rule. Also, (v) in the absence of the balanced-budget rule, the consumption tax is superior from the viewpoint of fixed-point output under equal for both taxes revenue, (vi) but no clear-cut results may be obtained in the presence of this rule, (vii) which rule complicates in addition the matter of tax equivalence considerably, making it a matter of nonlinear taxation even in the simple analytical framework of this paper.