A Critique on General Consumption Tax

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I criticize that a general consumption tax brings not only an inefficiency of the market equilibrium allocation but also a corruption of the government. The rate of a general consumption tax is equal to the gains to trade at the inefficient equilibrium allocation, which corresponds to the maximal rate of default allowed in an infinitesimal Pareto improving trade by consumers. It is by itself unobservable in the market, but the implementation of a general consumption tax makes it observable. Since the government is the sole economic agent that has an ability to execute complex trades outside the market which allow default, a general consumption tax makes an opportunity of seizure a common knowledge among relevant members of the government. By finding an infinitesimal Pareto improving trade in which the government can seize almost maximally, and extending it with keeping the drop in the rate of seizure minimum so as to force consumers only marginally improved, they can gain in utility significantly by the seizure. Such a trade can be constructed out of observables in the market and can be executed under the balanced budget by the government.

欧文抄録: p.183

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