The Tax Mix Matters Less Than We Thought

Lane Kenworthy

in Progress for the Poor

Published in print August 2011 | ISBN: 9780199591527
Published online January 2012 | e-ISBN: 9780191731389 | DOI:
The Tax Mix Matters Less Than We Thought

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To provide transfers and services, governments must tax. In affluent countries the principal sources of government revenue are taxes on income (individual and corporate), payroll, and consumption. What is the optimal mix among these three types of taxes? The comparative empirical record suggests the following: Income taxes are the most progressive of the three. But taxation tends to have relatively little direct impact on the income distribution; transfers and services are far more important. Consumption and payroll taxes have not been the key to expansion of tax revenues in recent decades. The nations that have increased revenues (as a share of GDP) have done so as much via income taxes. Countries relying more heavily on income taxes have not suffered slower economic growth. Nations that rely more heavily on payroll taxes do appear to have had slower employment growth over the past few decades. For policy makers seeking an optimal tax mix, these findings suggest that countries have a good bit of leeway to choose.

Keywords: taxes; tax mix; income tax; consumption tax; payroll tax; progressivity; redistribution

Chapter.  4376 words.  Illustrated.

Subjects: Political Economy

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