ISP Working Paper Number 07-12

From Income Tax to Consumption Tax? The Case of Jamaica

Roy Bahl and Sally Wallace, June 2007

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Abstract:

Over the past decade, a number of countries have shifted to single rate tax systems with broader bases and lower rates. In the U.S. , there continues to be discussion of the merits of a consumption tax, and of base-broadening reforms to the income tax system. The objective of this paper is to demonstrate how, over time, a conventional income tax could be converted to a flat rate consumption tax in a developing country. The value of this analysis, we hope, comes with the use of a real world situation ( Jamaica ), which allows us to focus on the detail that determines the feasibility of transitioning to a flat rate tax on consumption. Our main contribution is to show the conditions under which the switch can be revenue neutral.