Shaoqing Huang: This paper revisits the classic question: Are value-added tax (VAT) and retail sales tax (RST) equivalent? Traditionally, the answer is “Yes.” In this paper, however, it is “No!” The innovation in this paper is introducing output tax into the model. In this scenario: (1) a decrease in VAT accompanied by a change in RST increases capital accumulation and the welfare in the steady state; (2) on the transition path, it decreases the current generation's welfare.

The contribution of this paper is that it introduces a new mechanism through which RST and VAT have different effects on the economy. That is, they have different effects on capital supply (savings) and capital demand. When output tax is present, the first one dominates. To be concrete, when gamma (the rate of VAT) increases,...

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