The Built-in Flexibility of ConsumptionTaxes

The purpose of this paper is to extend the analysis of built-in ‡exibilityto various forms of consumption taxation. This is useful in view of theextensive use of indirect taxes. Section 2 begins with basic de…nitions anda discussion of income taxation, concentrating on the multi-step case. Thisis needed in view of the fact that consumption is from income net of incometaxation. Section 3 extends the analysis to include ad valorem and unitconsumption taxes. Section 4 examines the implications for the revenueelasticity of changes in indirect tax rates. Some illustrative calculations arereported in section 5. Section 6 brie‡y concludes.