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The Efficiency Gains from Dynamic Tax Reform

  • Auerbach, Alan J
  • Kotlikoff, Laurence J
  • Skinner, Jonathan

This paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general. equilibrium rational expectations growth path of life cycle economies. The principal findings concern the effects of switching from a proportional income tax with rates similar to those in the U.S. to either a proportional tax on consumption or a proportional tax on labor income. A switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources. In contrast, a transition to wage taxation generates a loss of greater than ? percent of lifetime re- sources. A second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 24 (1983)
Issue (Month): 1 (February)
Pages: 81-100

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Handle: RePEc:ier:iecrev:v:24:y:1983:i:1:p:81-100
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  1. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  2. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-58, December.
  3. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June.
  4. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
  5. Weber, Warren E, 1970. "The Effect of Interest Rates on Aggregate Consumption," American Economic Review, American Economic Association, vol. 60(4), pages 591-600, September.
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