The Inequity of Consumption-Based Tax Systems

TL;DR

This paper analyzes the regressive nature of consumption-based tax systems, showing they disproportionately burden the poor and questioning their fairness through numerical simulations.

Contribution

It provides a quantitative assessment of consumption taxes' regressivity and compares universal versus targeted redistribution strategies.

Findings

Consumption taxes are inherently regressive, burdening the poorest 40%.

Poor households contribute over half of total tax revenue.

Targeted redistribution can improve fairness.

Abstract

This study examines the lack of redistributive effectiveness of consumption-based tax systems with respect to social fairness. Through numerical simulations, we explore the wealth exchanges among economic agents subject to flat consumption taxes, comparing universal redistribution with optimal targeted approaches. The results demonstrate that consumption taxes exhibit inherent regressivity, disproportionately burdening the poorest 40% of households who contribute over half of total tax revenue for most tax rates. The findings challenge the equity of consumption taxes and provide quantitative insights for designing more fair fiscal policies.