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Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems

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  • Kenichi Fukushima

    (University of Minnesota and FRB Minneapolis)

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    Abstract

    This paper sets up an overlapping generations general equilibrium model with incomplete markets similar to Conesa, Kitao, and Krueger's (2009) and uses it to simulate a policy reform which replaces an optimal flat tax with an optimal non-linear tax that is allowed to be arbitrarily age and history dependent. The reform shifts labor supply toward productive households and thereby increases aggregate productivity. This leads to higher per capita consumption and shorter per capita hours. Under a utilitarian social welfare function that places equal weight on all current and future cohorts, the implied welfare gain is worth more than 10% in lifetime consumption equivalents.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 410.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:410

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    Cited by:
    1. Marco Del Negro & Fabrizio Perri & Fabiano Schivardi, 2010. "Tax buyouts," Staff Report 441, Federal Reserve Bank of Minneapolis.
    2. Cagri Seda Kumru & John Piggott, 2012. "Optimal Capital Income Taxation with Means-tested Benefits," CAMA Working Papers 2012-21, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.

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