The Consumption Tax, Horizontal Redistribution, And Aggregate Saving

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Mathematical Modelling


If an income tax is converted to a consumption tax of equal progressivity and equal yield, within each income class disposable income will be shifted from “low savers” to “high savers.” The impact of this “horizontal redistribution” has been neglected in previous analyses which focused on the interest elasticity of saving. We prove that “horizontal redistribution” must raise aggregate saving if persons possess “disposable income saving functions” (with certain properties and not all identical). We calculate that, if constant saving rate functions generated actual cross-section data in the U.S. in 1963, then tax conversion would have raised aggregate household saving by approximately 11% through the “horizontal redistribution effect.”