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A Note on the Optimality of the Cash Flow Tax

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  • Pablo Serra
  • Daniel Hojman

Abstract

This paper analyzes the optimal tax policy within an endoge-nous growth model with productive government spending. We consider a one-factor (human capital) one-good economy, with the latter serving both as a final and an intermediate good. The government levies taxes in order to finance the provision of the intermediate good. Within this framework we show a highly intuitive result: the optimal tax structure is a 100 percent tax on cash flows and no tax on labor income. As a consequence, the consumption tax causes a deadweight loss, which increases with the intensity of use of the intermediate good.

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  • Pablo Serra & Daniel Hojman, 2000. "A Note on the Optimality of the Cash Flow Tax," Documentos de Trabajo 83, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:83
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    References listed on IDEAS

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    1. Gian Maria Milesi-Ferrett & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," NBER Working Papers 5317, National Bureau of Economic Research, Inc.
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    5. William M. Gentry & R. Glenn Hubbard, 1997. "Distributional Implications of Introducing a Broad-Based Consumption Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 1-48, National Bureau of Economic Research, Inc.
    6. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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