Tax in the UK: analysis of a progressive consumption tax
Is progressive consumption tax a fairer tax solution?
NIESR conducted an analysis of the distributional consequences of a progressive consumption tax (PCT) compared with current income tax and VAT arrangements.
They found a properly designed progressive consumption tax enhances welfare in three ways:
- It helps households to smooth their consumption over the life cycle. It evens out consumption over time because it allows individuals to earn and save during their working life without tax disincentives and plan smooth consumption paths over their lifetime. Furthermore, progressive taxes on consumption only set in once a certain threshold is reached (e.g., a tax-free threshold of £100 per week), which enables low-income households to consume more of their income.
- A PCT enables households to make more flexible decisions about the balance between labour and leisure by incentivising employment for all households, not only low-income households but also higher-income ones because they are taxed more on what they consume than what they earn.
- A PCT enables households to accumulate wealth because it generates incentives to increase saving for all income groups.