The Impact of Converting to a Consumption Tax When Saving Propensities Vary: An Empirical Analysis

It has been recognized that conversion of an income tax to a consumption tax can increase aggregate saving even if each household maintains a constant propensity to save. The reason is heterogeneity: the variation in the propensity to save among households. How much of an increase in saving is an empirical question. Using the best available (but not wholly adequate) U.S. data, we estimate that the increase may be as much as 10% of saving. New data stratified by age would be necessary to obtain a more reliable estimate. Copyright Kluwer Academic Publishers 1998