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Welfare Effects of Consumption Taxes

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dc.contributor.advisor Carceles-Poveda, Eva en_US
dc.contributor.advisor Anagnostopoulos, Alexis en_US
dc.contributor.author Li, Qian en_US
dc.contributor.other Department of Economics en_US
dc.date.accessioned 2017-09-20T16:52:40Z
dc.date.available 2017-09-20T16:52:40Z
dc.date.issued 2015-08-01
dc.identifier.uri http://hdl.handle.net/11401/77424 en_US
dc.description 68 pgs en_US
dc.description.abstract Driven by high government deficits and an unevenly distributed tax burden, recent debates on economic policy have revolved mostly around reforms in the American tax codes. Consumption tax reforms are considered to circumvent the efficiency-equity tradeoff that other reforms might encounter. The first two chapters of the dissertation study long run consequences of changing to a consumption tax regime, as well as short run welfare effects evaluated in transitional dynamics. In the first chapter, we found that switching from labor income taxes to consumption taxes stimulates stronger precautionary motives, leading to a substantial increase in aggregate capital and labor supply under a balanced government budget. Furthermore, consumption tax reforms favor households with a low wealth-to-earnings ratio. Therefore, given that the wealth distribution is more concentrated than the distribution of earnings, consumption tax reforms effectively reduce the welfare inequality. Another novel aspect of this paper is to quantify the effects of progressive consumption tax reforms. The tax scheme I adopt is clean and easy to implement. It allows for tax exemptions in consumption, while imposing a constant marginal tax rate on the additional amounts. I find that households with low earnings benefit most from the reform. The second chapter is built on the first chapter, answering the following two questions: Is there any welfare gain if a consumption tax reform is announced in advance? Does welfare inequality reduce in response to pre-announcements? In this framework, households respond to two opposite effects of changing from labor income taxes to consumption taxes. First, anticipating higher consumption taxes in the future, households tend to consume more, substitute labor for leisure and save less. Second, eliminating labor income taxes increases the volatility of future income. As a result, households accumulate more capital under stronger precautionary motives. I show that changes in aggregate variables and welfare inequality depend crucially on the risk aversion parameter because the degree of risk aversion determines the intensity of precautionary motives. If the risk aversion parameter is low, anticipation motives dominate precautionary motives, such that the aggregate capital falls before the tax change and bounces back afterwards. Households with relatively low wealth and relatively high earnings benefit from consumption tax reforms in the long run, but are hurt in the short run during the anticipation because of an increasing interest rate and a falling wage rate. Nevertheless, the long run effect dominates the short run effect, hence households with a low wealth-to-earnings ratio still experience a welfare gain in the presence of anticipation. Given that the wealth distribution is more concentrated than the distribution of earnings, consumption tax reforms with a pre-announcement can deliver a positive aggregate welfare gain and a reduction in welfare inequality. However, if the risk aversion parameter is high, precautionary motives dominate anticipation motives, the transition pattern of the aggregate capital reverses. Moreover, the aggregate welfare gain is more substantial as compared to the previous case. Given that flat consumption taxes have no effect on long run aggregate capital formation when markets are complete. The final chapter provides conditions on utility under which a similar statement is true under incomplete markets. When these conditions are satisfied, using a flat consumption tax to finance an increase in government spending does not affect precautionary savings. In contrast, using lump sum taxes tends to increase precautionary savings. en_US
dc.description.sponsorship This work is sponsored by the Stony Brook University Graduate School in compliance with the requirements for completion of degree. en_US
dc.format Monograph en_US
dc.format.medium Electronic Resource en_US
dc.language.iso en_US en_US
dc.publisher The Graduate School, Stony Brook University: Stony Brook, NY. en_US
dc.subject.lcsh Economics en_US
dc.subject.other Anticipation, Flat consumption taxes, Incomplete markets, Precautionary Savings, Progressive consumption taxes, Welfare inequality en_US
dc.title Welfare Effects of Consumption Taxes en_US
dc.type Dissertation en_US
dc.mimetype Application/PDF en_US
dc.contributor.committeemember Atesagaoglu, Erem en_US
dc.contributor.committeemember Peng, Yulei en_US


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