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The Efficiency Gains from Dynamic Tax Reform

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Author Info
Alan J. Auerbach
Laurence J. Kotlikoff
Jonathan Skinner

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Abstract

This paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general. equilibrium rational expectations growth path of life cycle economies. The principal findings concern the effects of switching from a proportional income tax with rates similar to those in the U.S. to either a proportional tax on consumption or a proportional tax on labor income. A switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources. In contrast, a transition to wage taxation generates a loss of greater than ? percent of lifetime re- sources. A second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0819.

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Date of creation: Sep 1983
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Handle: RePEc:nbr:nberwo:0819

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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.:
  1. Alan J. Auerbach & Laurence J. Kotlikoff, 1983. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 459-498 National Bureau of Economic Research, Inc. [Downloadable!]
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  2. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September. [Downloadable!] (restricted)
  3. Weber, Warren E, 1970. "The Effect of Interest Rates on Aggregate Consumption," American Economic Review, American Economic Association, vol. 60(4), pages 591-600, September. [Downloadable!] (restricted)
  4. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June. [Downloadable!] (restricted)
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  5. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-58, December. [Downloadable!] (restricted)
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