The Welfare Cost of Distortions in the United States Tax System: A General Equilibrium Approach
Using a general equilibrium model of the United States economy,we examine the combined welfare cost of all taxes in the U.S. revenue system.We find that the welfare losses caused by distortionary taxation can be very large, both on average and at the margin.The marginal welfare loss to consumers from raising an additional dollar of revenue is in the range of 34 cents to 48 cents, depending on certain elasticities. This has very important implications for cost-benefit analysis.If a public project must be financed by distortionary taxes which cause dead-weight loss, this excess burden must be taken into account when we decide whether to undertake the project. Our calculations indicate that the marginal deadweight loss is between one-third and one-half of marginal revenues. This large wedge could cause us to approve many fewer projects than we would approve if we were to use the simple condition that the sum of the marginal rates of substitution should equal the marginal rate of transformation.The average deadweight loss per dollar of revenue is smaller than the marginal deadweight loss, but it is still substantial. We estimate that the present value of the gain from replacing the distortionary tax system with certain lump sum taxes would be in the range of $1.8 trillion to $3.1 trillion,or 13 cents to 22 cents per dollar of revenue. The gains would be about 60 percent as great if the existing system were replaced with a proportional income tax. Replacing the existing system with a consumption-type value-added tax would give even greater gains than those from switching to a proportional income tax.
|Date of creation:||Dec 1982|
|Date of revision:|
|Publication status:||published as Ballard, Charles L., John B. Shoven and John Whalley. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States." American Economic Review, Vol. 75, No. 1, (March1985), pp. 128-138.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
- Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1981.
"The Efficiency Gains from Dynamic Tax Reform,"
NBER Working Papers
0819, National Bureau of Economic Research, Inc.
- Auerbach, Alan J & Kotlikoff, Laurence J & Skinner, Jonathan, 1983. "The Efficiency Gains from Dynamic Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 81-100, February.
- Lawrence H. Goulder & John B. Shoven & John Whalley, 1982. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium," NBER Working Papers 0919, National Bureau of Economic Research, Inc.
- George J. Borjas & James J. Heckman, 1978. "Labor Supply Estimates For Public Policy Evaluation," NBER Working Papers 0299, National Bureau of Economic Research, Inc.
- Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
- John B. Shoven & John Whalley, 1973. "General Equilibrium with Taxes: A Computational Procedure and an Existence Proof," Review of Economic Studies, Oxford University Press, vol. 40(4), pages 475-489.
- A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
- Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
- Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
- Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24 National Bureau of Economic Research, Inc.
- Fullerton, Don, et al, 1981. "Corporate Tax Integration in the United States: A General Equilibrium Approach," American Economic Review, American Economic Association, vol. 71(4), pages 677-91, September.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1043. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.