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Neglected Effects on the Uses Side: Even a Uniform Tax Would Change Relative Goods Prices

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  • Don Fullerton
  • Diane Lim Rogers

Abstract

Fundamental tax reform may change relative prices of consumption goods and may therefore have important effects on the uses side that are ignored by most general equilibrium simulation models. For a uniform rate of tax, in our model, results on the uses side are driven by the nonuniform tax system being replaced. Similar effects occur under any uniform and comprehensive tax reform, whether the current system is replaced by a consumption tax, a wage tax, or a pure income tax. Any such reform that eliminates the current preferential treatment of housing would impose an additional one-time levy on the elderly, and any reform that eliminates the current double taxation of corporate capital would reduce the relative prices of corporate-capital-intensive goods bought by the poor.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5937.

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Date of creation: Feb 1997
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Publication status: published as American Economic Review, vol.87, no.2, (May 1997): 120-125.
Handle: RePEc:nbr:nberwo:5937

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  1. Jorgenson, Dale W & Wilcoxen, Peter J, 1997. "The Long-Run Dynamics of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 126-32, May.
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Cited by:
  1. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  2. Darrel Cohen & Kevin Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 199-234 National Bureau of Economic Research, Inc.

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