The Built‐in Flexibility of Income and Consumption Taxes

Abstract

This paper reviews, and synthesises within a uniform framework, a number of analytical results on the built-in flexibility of taxation. Established results for income taxes are reviewed and integrated with recent results for consumption taxes. These help to provide a better understanding of the determinants of the revenue responsiveness properties of different taxes. They also provide convenient expressions for the calculation of tax revenue elasticities in practice. It is shown that the magnitude of revenue elasticities can be expected to differ substantially for alternative taxes, for different forms of the same tax, and for the same tax over time as incomes change relative to tax thresholds and as consumption patterns change. These results are especially relevant for the many industrialised countries which have undertaken major fiscal reforms in recent years with, often unintended, consequences for revenue elasticities.

The Revenue Responsiveness of Income and Consumption Taxes in the UK

“…This gives exactly the same results as obtained using analytical results based on the properties of the lognormal, using the expressions given in Creedy and Gemmell (2002). However, the simulated values are necessary here for the subsequent computation of consumption tax revenue elasticities.…”

“…1 1 They used measures developed in the early 1980s for income taxation by Fries et al (1982) and Hutton and Lambert (1980, 1982a, 1982b, 1983). For a review of analytical expressions and concepts, and references on alternative methods, see Creedy and Gemmell (2002). …”

“…5 It is implausible that h a k ,y i > 1 across a wide range of incomes, since this implies a policy whereby effective allowances are increased by more than £1 for each additional £1 of income. 6 For a treatment of the non-equiproportional case, seeCreedy and Gemmell (2002).…”

Indirect Taxation and Progressivity: Revenue and Welfare Changes

“…For further details of this approach, see Creedy and Sleeman (2005b). 10 Although there are too many regressions to be reported here, results using a much higher level of aggregation are given in Creedy and Gemmell (2004), who obtained results, as part of a study of aggregate tax-revenue elasticities, for all households combined, rather than separating the sample into 36 demographic groups as here. by Dixon et al (1982) in calibrating their general-equilibrium model.…”

The Revenue Responsiveness of Consumption Taxes

“…These questions have been addressed extensively in the literature in relation to income taxes, allowing their general built-in flexibility and redistributive properties to be understood. For example, convenient analytical expressions have been derived for the revenue elasticity of income taxes which are tractable and allow estimates of tax elasticities to be obtained; see Creedy and Gemmell (2002) for a survey of results. However, without similar analytical expressions for consumption taxes, estimates of their revenue responsiveness and therefore of the responsiveness of systems involving both income and consumption taxes have previously relied on case-specific empirical exercises or simulation methods.…”