(When) is consumption taxation equivalent to wage taxation?

This article deals with the question of the equivalence between consumption taxation and wage income taxation. It is argued that when individuals behave according to strict life-cycle reasons, these taxes are not equivalent in either of the standard senses. Although a balanced-budget increase in the wage tax unambiguously decreases the steady-state capital-labor ratio, a balanced-budget increase in the consumption tax may have any impact on long-run capital accumulation. A differential incidence shift from wage to consumption taxation is associated with a higher value of the steady-state capital-labor ratio and increases welfare when the starting point is a dynamically efficient steady state. However, in the presence of intergenerational altruism, consumption and wage taxes are structurally equivalent (i.e., both in balanced-budget terms and under a differential incidence approach). An increase in any of them entails no effect on the steady-state capital-labor ratio and welfare level, with the only consequence of transferring resources away from the private sector and to the government.