Flat Tax Reform: A Quantitative Exploration

This paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the U.S. is replaced by a flat tax, as proposed by Hall and Rabushka (1995). The central aspects of such reform, the impact of tax reform on capital accumulation, labor supply and welfare, as well as its distributional consequences, are analyzed in a dynamic general equilibrium model where key features of the actual tax code are modelled. The main results are that, i) the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation; ii) mean labor hours typically decrease in the cases considered, but aggregate labor in efficiency units increases; iii) in all circumstances analyzed, the distributions of earnings, income and especially wealth become more concentrated; iv) in some cases, despite significant aggregate welfare gains, not all households benefit from tax reform.(This abstract was borrowed from another version of this item.)