America's aging coupled with high and growing old age health and pension benefits augers for much higher payroll taxes, with potentially damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model, which closely captures projected changes in U.S. demographics. The FairTax offers a potential alternative to this dismal economic future. The FairTax proposes to replace the federal payroll tax, personal income tax, corporate income tax, and estate tax (not modeled here) with a progressive consumption tax delivered in the form of a federal retail sales tax plus a rebate. According to our simulation model, these policy changes would almost double the U.S. capital stock by the end of the century and raise long-run real wages by 19 percent compared to the base case alternative. They would also preclude a doubling of the highly regressive payroll tax. Indeed, the poorest members of each cohort experience remarkably large welfare gains from the FairTax. To be specific, today's elderly poor are predicted to experience a 13 to 14 percent welfare gain. In contrast, their middle class counterparts enjoy a 1 to 2 percent gain, and their richest counterparts experience a .5 to 1 percent welfare loss. Poor baby boomers experience 8 percent gains, while middle- and upper-income boomers experience either very small welfare losses or small gains. Once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohorts. For example, the poorest members of the generation born in 1990 enjoy a 16 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 27 percent improvement in their well being. For middle class members of this birth group, there's an 11 percent welfare gain. And for the richest members of the group, the gain is 5 percent. The remarkable point here is the size of the gains from the reform relative to the losses. Yes, some initial high- and middle-income households are made worse off, but their welfare losses are minor compared with the gains available to future generations, particularly the poorest members of future generations. While our model is highly stylized, it suggests that the FairTax offers a real opportunity to improve the U.S. economy's performance and the wellbeing of the vast majority of Americans. The winners from this reform, primarily those who are least well off, experience very major gains, and the losers experience only minor losses.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11858.
Length: Date of creation: Dec 2005 Date of revision: Handle: RePEc:nbr:nberwo:11858
Note: PE Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Related research
Keywords:
Other versions of this item:
Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
References listed on IDEAS 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.:
Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Feldstein, Martin & Liebman, Jeffrey B., 2002.
"Social security,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324
Elsevier.
[Downloadable!] (restricted)
Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000.
"Country portfolios,"
Economics Working Papers
913, Department of Economics and Business, Universitat Pompeu Fabra.
[Downloadable!]
Aart Kraay & Norman Loayza & Luis Serven & Jaume Ventura, 2000.
"Country Portfolios,"
NBER Working Papers
7795, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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.)