Identical Twins? Destination-Based Cash-Flow Taxes Versus Consumption Taxes with Payroll Subsidies
IMF Working Papers, December 14, 2017
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Bibliographic details
- Authors: Benjamin Carton, Emilio Fernández Corugedo, Benjamin L Hunt
- Published: December 14, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484332993.001
Model and approach
- Uses the Global Integrated Monetary and Fiscal model (GIMF), a multi-region, forward-looking, DSGE model developed by the Economic Modeling Division of the IMF for policy analysis and international economic research.
- Compares a destination-based cash-flow tax (DBCFT) to a combination of a consumption tax and a labor (payroll) subsidy, which have been advocated as practical proxies for implementing DBCFTs.
- Focuses on equivalence in terms of real economy responses and tax revenue responses.
Main equivalence finding
- Documents the conditions under which a destination-based cash-flow tax is identical to a combination of a consumption tax plus a labor subsidy.
- Under those conditions, both tax instruments produce identical outcomes for the real economy and for tax revenue.
Conditions that break equivalence
- Introduction of finitely lived consumers who value government debt as net wealth breaks equivalence in terms of the real economy.
- Introduction of untaxed government expenditure breaks equivalence in terms of tax revenue.
Policy implications and interpretation
- Treating a consumption tax plus labor subsidy as a proxy for a DBCFT is valid only under specific modeling assumptions; deviations from those assumptions can lead to materially different economic and revenue outcomes.
- Attention is required when implementing or modeling DBCFTs to account for household life horizons and the treatment of government debt and government spending in tax bases, as these features can change both macroeconomic and revenue implications.