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Posted on July 27th, 2012, by

The taxation system plays a tremendously important role in the economic life of any country and it produces a profound impact on the development of business. In this respect, it should be said that today consumption tax and income tax are viewed as the major taxes which constitute the major source of revenues in the majority of modern economies. At the same time, specialists argue about the superiority of either tax and, in this regard, it is possible to refer to the research conducted by Joseph Bankman and David A. Weisbach “The Superiority of an Ideal Consumption Tax over an Ideal Income Tax”¯.

The researchers focus on the problem of the superiority of either tax and, on analyzing the problem they arrive to the conclusion that in the contemporary economy the consumption tax is more efficient compared to the income tax.

The researchers focus on the comparison of ideal consumption and income taxes and they believe that in a real life economy their conclusion concerning the superiority of the consumption tax would be even more obvious than in an ideal model.

In order to analyze the data on both taxes, the researchers used the comparison of both taxes and the alternative method of analyzing the problem, which was first developed by Hylland and Zeckhauser. This method uses a “replicating tax”¯ argument. It starts with a non-neutral commodity tax and shows how to construct a Pareto superior neutral tax. This method of analysis has two key strengths: firstly, it extends the result of cases in which a labor income or commodity tax is not optimal; and, secondly, the analysis is more direct and intuitive.

On the basis of this analysis the researchers made a conclusion that the consumption tax is superior to the income tax.

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