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Tax Buyouts

  • Marco Del Negro

    (Federal Reserve Bank of New York)

  • Fabrizio Perri

    (University of Minnesota. FRB of Minneapolis, CEPR and NBER)

  • Fabiano Schivardi

    (University of Cagliari, EIEF and CEPR)

The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions,it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1007.

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Length: 42 pages
Date of creation: 2010
Date of revision: Mar 2010
Handle: RePEc:eie:wpaper:1007
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