Review of Economic Studies Vol. 91 No. 5 2024

Informality, Consumption Taxes, and Redistribution

Pierre Bachas¹; Lucie Gadenne²; Anders Jensen³

¹ ESSEC Business School, France and World Bank Research , USA · ² Queen Mary University of London, Institute for Fiscal Studies and CEPR , UK · ³ Harvard Kennedy School and NBER , USA

Abstract

Can taxes on consumption redistribute in developing countries? Contrary to consensus, we show that taxing consumption is progressive once we account for informal consumption. Using household expenditure surveys in 32 countries, we proxy for informal consumption using the type of store where purchases occur. We establish that the budget share spent in informal stores steeply declines with income, so that richer households pay a substantially larger share of their income in taxes. Our findings imply that the widespread policy of exempting food from taxation is hard to justify on equity grounds in low-income countries.

DOI

10.1093/restud/rdad095

Volume

91

Issue

5

Pages

2604-2634

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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