Simulating U.S. Tax Reform
AbstractThis paper uses a new large-scale dynamic simulation model to compare the equity, efficiency, and macroeconomic effects of five alternative to the current U.S. federal income tax. These reforms are a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the 'X tax.' The model incorporates intragenerational heterogeneity and kinked budget constraints. It predicts major macroeconomic gains (including an 11 percent increase in long-run output) from replacing the federal tax system with a proportional consumption tax. Future middle- and upper-income classes gain from this policy, but initial older generations are hurt by the policy's implicit capital levy. Poor members of current and future generations also lose. The The flat tax, which adds a standard deduction to the consumption tax, makes all members of future generations better off, but at a cost of halving the economy's long-run output gain and harming initial older generations. Insulating these older generations through transition relief further reduces transition relief further reduces the long-run gains from tax reform. Switching to a proportional income tax without deductions and exemptions hurts current and future low lifetime earners, but helps everyone else. It also raises long-run output by over 5 percent. The X tax makes everyone better off in the long-run and also raises long-run output by 7.5 percent. But it harms initial older generations who bear its implicit wealth tax.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6248.
Date of creation: Oct 1997
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
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.:
- David Altig & Charles T. Carlstrom, 1996.
"Marginal tax rates and income inequality in a life-cycle model,"
9621, Federal Reserve Bank of Cleveland.
- Charles T. Carlstrom & David Altig, 1999. "Marginal Tax Rates and Income Inequality in a Life-Cycle Model," American Economic Review, American Economic Association, vol. 89(5), pages 1197-1215, December.
- Correia, Maria Isabel Horta, 2005.
"Consumption Taxes and Redistribution,"
CEPR Discussion Papers
5280, C.E.P.R. Discussion Papers.
- Fehr, Hans & Ruocco, Anna, 1999. "Equity and efficiency aspects of the Italian debt reduction," Economic Modelling, Elsevier, vol. 16(4), pages 569-589, December.
- Fougere M. & Harvey S. & Mercenier J. & Merette M., 2008.
"Population Ageing, Time allocation and Human Capital: a General Equilibrium Analysis for Canada,"
Working Papers ERMES
0806, ERMES, University Paris 2.
- Fougère, Maxime & Harvey, Simon & Mercenier, Jean & Mérette, Marcel, 2009. "Population ageing, time allocation and human capital: A general equilibrium analysis for Canada," Economic Modelling, Elsevier, vol. 26(1), pages 30-39, January.
- Jaime Acosta-Margain, 2011. "Tax-benefit incidence of value added tax on food and medicine to fund progressive social expenditure," Working Papers 194, ECINEQ, Society for the Study of Economic Inequality.
- Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
- Peichl, Andreas, 2005. "Die Evaluation von Steuerreformen durch Simulationsmodelle," FiFo Discussion Papers - Finanzwissenschaftliche DiskussionsbeitrÃ¤ge 05-1, University of Cologne, FiFo Institute for Public Economics.
- Lewis, Kenneth A. & Seidman, Laurence S., 2001. "The Consumption Tax and Transitional Relief," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 99-120, January.
- Edward N. Wolff & Ajit Zacharias, 2003. "The Levy Institute Measure of Economic Well-Being," Economics Working Paper Archive wp_372, Levy Economics Institute, The.
- Vincent Touze & Jacques Le Cacheux, 2002.
"Les modèles d’équilibre général calculable à générations imbriquées : enjeux, méthodes et résultats,"
Sciences Po publications
info:hdl:2441/2091, Sciences Po.
- Jacques Le Cacheux & Vincent Touzé, 2002. "Les modèles d'équilibre général calculable à générations imbriquées. Enjeux, méthodes et résultats," Revue de l'OFCE, Presses de Sciences-Po, vol. 80(1), pages 87-113.
- Ernst Fehr & Wolfgang Wiegard, 2001. "The Incidence of an Extended Ace Corporation Tax," CESifo Working Paper Series 484, CESifo Group Munich.
- Harry ter Rele, 2005. "Measuring lifetime redistribution in Dutch collective arrangements," CPB Document 79, CPB Netherlands Bureau for Economic Policy Analysis.
- Katharine Anderson & Eric French & Tina Lam, 2004. "You can't take it with you: asset run-down at the end of the life cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 40-54.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.