Economic Logic: Consumption taxation is not that regressive: "The alternative is taxing consumption, which you indeed want to discourage in favor of investment, but a consumption tax is deemed regressive and unfair: it hurts proportionally more the poor than the rich.
Nico Pestel and Eric Sommer claim that this perception may only hold in the short-term. Indeed, they find the standard result that a revenue-neutral switching from labor income tax to value-added tax is regressive in the short run. This seems to reverse itself in the longer run, though, thanks to a shift in the labor supply. Using a model estimated on German data, they highlight that the ones responding the most to the reduction in the wage taxation are indeed the poorest, and their response overcomes the progressivity of the income tax. The key here is also reducing payroll taxes which seem to be very discouraging for low income workers"
'via Blog this'
