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Monetary effects of a consumption tax
Author(s) -
Holmes James M.,
Smyth David J.,
Hutton Patricia A
Publication year - 2004
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2004.00238.x
Subject(s) - economics , consumption tax , consumption (sociology) , monetary economics , value added tax , indirect tax , ad valorem tax , tax reform , macroeconomics , public economics , social science , sociology
. This paper analyzes the short‐run effects of a consumption tax increase (VAT or national sale tax) on aggregate demand. Because it increases the prices paid by consumers relative to the prices received by suppliers, a consumption tax affects the supply of real money balances, in addition to reducing expenditures. Hence, when a consumption tax replaces an income tax so as to maintain a balanced government budget, the net effect can plausibly be contractionary.