The effect of income shifting on the efficiency properties of consumption-tax systems

It is well known that consumption-tax systems have several advantagesover existing income-tax systems, such as greater administrativesimplicity and intertemporal neutrality. Despite these advantages,proposals to introduce consumption taxes have only had very limitedsuccess. This paper discusses possible explanations for the reluctanceof governments to switch to consumption taxation. Our analysis focuseson the role of income shifting as a drawback for consumption-tax reform.We consider a model where taxpayers may shift income between thepersonal and the corporate income-tax base. In this model, aconsumption-tax system characterized by intertemporal neutrality anduniform tax rates on personal and corporate income is not second-bestefficient.