2020
DOI: 10.1920/wp.ifs.2020.1420
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Informality, Consumption Taxes and Redistribution

Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the place of purchase of each expenditure to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus make… Show more

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