Indirect Tax Exemptions and the Distribution ot Lifetime Income: A Simulation Analysis*

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Abstract
This paper uses a simulation model to compare the lifetime consequences of a revenue neutral partial shift towards a consumption tax, involving exemptions, with its cross‐sectional effects. Exemptions of goods consumed proportionately more by lower income groups reduce the inequality of the distribution of net lifetime consumption by more than in the cross‐sectional case. However, the tax shift increases lifetime inequality by more than it increases cross‐sectional inequality, and the net effect is that exemptions cannot compensate for the income tax change. Concern with inequality is most appropriately handled by raising transfer payments rather than introducing exemptions.