The Revenue Responsiveness of Consumption Taxes

This paper derives analytical expressions for the revenue elasticity of consumption taxes and combined income-consumption tax systems, analogous to those familiar for income taxes. It provides measures of tax revenue elasticities which can readily be applied in practice. Analytical results suggest that, unlike income taxes, consumption tax revenues are likely to be income-inelastic in practice, and total income plus consumption tax revenue, though generally elastic, can be expected to decline over time in the absence of counterveiling fiscal reforms. The results also provide some insight into the effects on tax revenue growth (often unintended or unknown) of reforms made with other policy objectives in mind