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Growth effects of shifting from a progressive tax system to a flat tax

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Author Info
Stephen P. Cassou
Kevin J. Lansing

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Abstract

This paper develops a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by Hall and Rabushka (1995). Using parameters calibrated to match the progressivity of the U.S. tax schedule and other features of the U.S. economy, we compute the growth and level effects of adopting a revenue-neutral flat tax for both a human-capital based endogenous growth model and a standard neoclassical growth model. Growth effects are decomposed into the parts attributable to the flattening of the marginal tax schedule, the full expensing of physical-capital investment, and the elimination of double taxation of corporate dividends. We find that the most important element of the reform is the flattening of the marginal tax schedule. Without this element, the combined effects of the other parts of the reform can actually reduce long-run growth.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2000-15.

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Date of creation: 2002
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Handle: RePEc:fip:fedfap:2000-15

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Keywords: Fiscal policy Flat-rate income tax Human capital

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Patrick Pintus, 2004. "International Capital Mobility and Aggregate Volatility: the Case of Credit-Rationed Open Economies," Computing in Economics and Finance 2004 193, Society for Computational Economics. [Downloadable!]
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