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Flat Tax Reforms In The U.S.: A Boon For The Income Poor

In this article we queantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4 percent increase in steady-state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6 percent reduction is steady-state output and a distribution of aftertax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17 percent of consumption, and in the more progessive flat-tax economy it increases by 0.45 percent of consumption. In both flat-tax refoms the income poor pay less income taxes and obtain sizeable welfare gains.

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Paper provided by CEMFI in its series Working Papers with number wp2006_0611.

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Date of creation: Jul 2006
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Handle: RePEc:cmf:wpaper:wp2006_0611
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