Altruism, Incomplete Markets, and Tax Reform

We calibrate the model to the U.S. data and numerically characterize transition paths from the current tax system to a reformed system. All our experiments are revenue-neutral. Starting from the current tax code, we allow for transitions to reformed steady-states in which the capital income taxation or labor income taxation is eliminated, with the lost revenues replaced by a higher labor income or consumption tax. In all cases, the reformed steady-state yields significantly higher capital and consumption. When the capital income tax is replaced by a higher labor income tax, only 38.4% are in favor. Using a consumption tax instead of the labor income tax raises support for reform to 45.7%. Eliminating the capital income tax in a phased-out fashion and using the more efficient consumption tax to replace the lost revenues brings support to 71.4%.