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Flat Tax Reforms in the US: A Boon for the Income Poor

  • Díaz-Giménez, Javier
  • Pijoan-Mas, Josep

In this article we quantify 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% 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% reduction in steady state output and a distribution of after-tax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17% of consumption, and in the more progressive flat-tax economy it increases by 0.45% of consumption. In both flat-tax reforms the income poor pay less income taxes and obtain sizeable welfare gains.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5812.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5812
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