INDIRECT TAX EXEMPTIONS AND THE DISTRIBUTION OF LIFETIME INCOME - A SIMULATION ANALYSIS

This paper uses a simulation model to compare the lifetime consequence s of a revenue neutral partial shift towards a consumption tax, involv ing exemptions, with its cross-sectional effects. Exemptions of goods consumed proportionately more by lower income groups reduce the inequa lity of the distribution of net lifetime consumption by more than in t he cross-sectional case. However, the tax shift increases lifetime ine quality by more than it increases cross-sectional inequality, and the net effect is that exemptions cannot compensate for the income tax cha nge. Concern with inequality is most appropriately handled by raising transfer payments rather than introducing exemptions.