Skip to main content
School of Economics and Finance
  1. School of Economics and Finance
  2. Research
  3. Working papers
  4. 2022
  5. Items

No. 945: Informality, Consumption Taxes and Redistribution

Pierre Bachas , World Bank Research
Lucie Gadenne , Queen Mary University
Anders Jensen , Harvard Kennedy School and NBER

December 9, 2022

Download full paper

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.

 

J.E.L classification codes: E26, H21, H23, 023

Keywords:Budget Surveys, Inequality, Informality, Redistribution, Taxes.

Back to top