Shifting the tax burden: from direct to indirect tax
briefing paper : n°3
A consumption tax amounts to exempt savings from taxation. As such, it would have important distributional effects, first of all from the poor to the rich, but also towards capital intensive industries; and intergenerational, away from the very young (students) and the old. For what concerns long term effects, most studies show that a consumption tax would be moderately more efficient and much simpler than the income tax. Nevertheless with such a tax, the progressivity of the current system could not be replicated. Attempts to mitigate the regressive features of the consumption tax would unavoidably lower the efficiency gains, and significantly increase complexity. I conclude that the passage to a consumption tax has to be done on the basis of a judgement of value (how progressive should our tax system be?), and not based on technical arguments. Shifting to a consumption tax would also imply an extremely complex transition that could be characterised by unemployment and inflation. For monetary policy, monitoring the economy during this transition would be extremely complex. Given the mixed picture that emerges from the analysis, I conclude asking why the consumption tax has taken such an echo in the current debate. May be because it is supposed to serve objectives that are not explicitly stated: either the objective of increasing competitiveness (but then, other tools like the exchange rate seem more straightforward and efficient), or the objective of reducing public spending.