Flat Tax Reforms: Investment Expensing And Progressivity
AbstractIn this article we quantify the aggregate, distributional and welfare consequences of investment expensing and progressivity in flat-tax reforms of the United Sates economy. We find that investment expensing as in the Hall and Rabushka type of reform brings about sizable output gains and non-trivial increase in after-tax income inequality. But we also find that it results in large aggregate welfare gains in steady-state. Two additional flat-tax reforms with full investment expensing and varying degrees of progressivity reveal that the distributional role of the tax-exemption in the labor income tax is limited. But we also find that the progressivity of the reforms matters for welfare: economies with more progressive consumption-based flat-taxes are good for the very poor and are ultimately preferred by a Benthamite social planner because they allow households to do more consumption and leisure smoothing. Our findings suggest that moving towards a progressive consumption-based flat tax scheme could achieve the goals of raising government income, stimulating the economy and providing a safety net for the households that have been hit the hardest by the recession.
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Bibliographic InfoPaper provided by CEMFI in its series Working Papers with number wp2011_1101.
Date of creation: Jan 2011
Date of revision:
Flat-tax reforms; progressivity; efficiency; inequality.;
Other versions of this item:
- Díaz-Giménez, Javier & Pijoan-Mas, Josep, 2011. "Flat Tax Reforms: Investment Expensing and Progressivity," CEPR Discussion Papers 8238, C.E.P.R. Discussion Papers.
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-02-05 (Accounting & Auditing)
- NEP-ALL-2011-02-05 (All new papers)
- NEP-DGE-2011-02-05 (Dynamic General Equilibrium)
- NEP-PBE-2011-02-05 (Public Economics)
- NEP-PUB-2011-02-05 (Public Finance)
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