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Replacing the U.S. income tax with a progressive consumption tax : A sequenced general equilibrium approach

  • Fullerton, Don
  • Shoven, John B.
  • Whalley, John

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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File URL: http://www.sciencedirect.com/science/article/B6V76-458WPKC-9F/2/36f851f6d700d61cad8a73b90641999a
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 20 (1983)
Issue (Month): 1 (February)
Pages: 3-23

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Handle: RePEc:eee:pubeco:v:20:y:1983:i:1:p:3-23
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. 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.
  2. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
  3. 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.
  4. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
  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. Boadway, Robin, 1979. "Long-run Tax Incidence: A Comparative Dynamic Approach," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 505-11, July.
  7. 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.
  8. 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.
  9. 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..
  10. Bernheim, B Douglas, 1981. "A Note on Dynamic Tax Incidence," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 705-23, November.
  11. 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.
  12. 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.
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