Wednesday, May 5, 2004

James Holmes (SUNY-Buffalo, Dep’t of Economics), David Smyth (Middlesex University Business School) & Patricia Hutton (Canisius College, Dep’t of Economics and Finance) have posted Monetary Effects of a Consumption Tax on SSRN. Here is the abstract:

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.