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Replacing the U.S. Income Tax with a Progressive Consumption Tax: A Sequenced General Equilibrium Approach

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  • Don Fullerton
  • John B. Shoven
  • John Whalley

Abstract

This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations. We find that the discounted present value of the stream of net gains is approximately $650 billion in 1973 dollars, just over one percent of the discounted present value of national income. Larger gains occur if further reform of capital income taxation accompanies the change. We examine the sensitivity of the results, both to the design of the consumption tax and to the values of elasticity and other parameters. The paper also contains estimates of the time required to adjust from one growth path to the other.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0892.

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Date of creation: May 1982
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Publication status: published as Fullerton, Don, John B. Shoven, John Whalley. "Replacing the U.S. Income Tax with a Progresssive Consumption Tax: A Sequenced General Equilibrium Approach." Journal of Public Economics, Vol. 20, (1983) pp. 3-23.
Handle: RePEc:nbr:nberwo:0892

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  1. Boadway, Robin, 1979. "Long-run Tax Incidence: A Comparative Dynamic Approach," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 505-11, July.
  2. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  3. Feldstein, Martin S, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 505-13, October.
  4. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 137-52, April.
  5. Lewis, H G, 1975. "Economics of Time and Labor Supply," American Economic Review, American Economic Association, vol. 65(2), pages 29-34, May.
  6. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  7. Levhari, David & Sheshinski, Eytan, 1972. "Lifetime Excess Burden of a Tax," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 139-47, Jan.-Feb..
  8. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  9. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24 National Bureau of Economic Research, Inc.
  10. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
  11. Bernheim, B Douglas, 1981. "A Note on Dynamic Tax Incidence," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 705-23, November.
  12. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bröcker, Johannes & Schneider, Martin, 1999. "How does economic development in eastern Europe affect Austria's regions? A multiregional general equilibrium framework," Discussion Papers 1/99, Dresden University of Technology, Faculty of Transportation and Traffic Sciences "Friedrich List", Institute for Transport and Economics.
  2. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
  3. James Alm & Asmaa El-Ganainy, 2012. "Value-added Taxation and Consumption," Working Papers 1203, Tulane University, Department of Economics.
  4. Ballard, Charles L. & Kang, Kiwon, 2003. "International ramifications of US tax-policy changes," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 825-835, November.
  5. Timothy J. Kehoe, 1996. "Social accounting matrices and applied general equilibrium models," Working Papers 563, Federal Reserve Bank of Minneapolis.
  6. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, July.
  7. Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge.
  8. Lin, Shuanglin, 1999. "Tax reform and external balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 891-909, December.
  9. Gordon, Roger H., 1989. "Notes on cash - flow taxation," Policy Research Working Paper Series 210, The World Bank.

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