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The Efficiency Gains from Dynamic Tax Reform

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  • Alan J. Auerbach
  • Laurence J. Kotlikoff
  • Jonathan Skinner

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.

Suggested Citation

  • Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1981. "The Efficiency Gains from Dynamic Tax Reform," NBER Working Papers 0819, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0819
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    References listed on IDEAS

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    1. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-549, September.
    2. 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.
    3. 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 468-496, June.
    4. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-858, December.
    5. E. S. Phelps & J. G. Riley, 1978. "Rawlsian Growth: Dynamic Programming of Capital and Wealth for Intergeneration "Maximin" Justice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 103-120.
    6. 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.
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