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Flat Tax Reforms in the U.S.: a Boon for the Income Poor

Author

Listed:
  • Javier Diaz-Gimenez

    (Universidad Carlos III)

  • Josep Pijoan-Mas

    () (CEMFI)

Abstract

We use a version of the neoclassical growth model economy to evaluate two revenue neutral flat-tax reforms. In the less progressive flat-tax reform the households face a 22 percent integrated flat tax and a labor income tax exemption of \$16,000 per household. In the more progressive flat-tax reform the flat-tax rate is 29 percent and the labor income tax exemption is \$32,000 per household. The households in our economy have identical preferences, they are altruistic towards their descendants and they go through the life cycle stages of working-age and retirement. The benchmark model economy replicates the main features of the current U.S. tax and transfer systems, and it accounts for the main aggregate and distributional features of the U.S. economy in very much detail. We find that both reforms result in a significant increase in wealth inequality. We also find that while the less progressive reform is expansionary (output increases by 2.4 percent), the less progressive reform is contractionary (output decreases by 2.6 percent). On the other hand, while the less progressive tax reform results in a more unequal distribution of income after taxes (its Gini index increases from 0.510 in the benchmark model economy to 0.524), the more progressive tax reform is significantly more egalitarian (the Gini index of its after-tax income distribution is only 0.497). Finally, we compute the steady-state welfare costs of the reforms and we find that equality wins the trade-off: in the less progressive reform aggregate welfare falls by −0.17 percent of consumption, and in the more progressive reform it increases by +0.45 percent of consumption. Both flat-tax reforms result in significant boons for the income poor who pay less income taxes and obtain sizeable welfare gains.

Suggested Citation

  • Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:400
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Flat taxes: good for the poor
      by chris dillow in Stumbling and Mumbling on 2006-07-17 19:37:42

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    Cited by:

    1. Andreas PEICHL, "undated". "The Benefits of Linking CGE and Microsimulation Models - Evidence from a Flat Tax analysis," EcoMod2008 23800106, EcoMod.
    2. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2011. "Income Taxation of U.S. Households: Basic Facts," IZA Discussion Papers 5549, Institute for the Study of Labor (IZA).
    3. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2014. "Income Taxation of U.S. Households: Facts and Parametric Estimates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 559-581, October.
    4. Michal Horvath & Matus Senaj & Zuzana Siebertova & Norbert Svarda, 2015. "The End of the Flat Tax Experiment in Slovakia," Discussion Papers 15/12, Department of Economics, University of York.
    5. Michal Horvath & Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2018. "Evaluating the Aggregate Effects of Tax and Benefit Reforms," Working Papers Working Paper No. 1/2018, Council for Budget Responsibility.
    6. Carroll, Daniel R. & Young, Eric R., 2011. "The long run effects of changes in tax progressivity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1451-1473, September.
    7. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2012. "Taxation and Household Labour Supply," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1113-1149.
    8. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2008. "Taxation, aggregates and the household," Working Papers 660, Federal Reserve Bank of Minneapolis.
    9. Peichl, Andreas, 2009. "Benefits and problems of linking micro and macro models - evidence from a flat tax analysis," ISER Working Paper Series 2009-02, Institute for Social and Economic Research.
    10. Oleksiy Kryvtsov & Alexander Ueberfeldt, 2007. "Schooling, Inequality and Government Policy," Staff Working Papers 07-12, Bank of Canada.
    11. Marta González-Torrabadella & Josep Pijoan-Mas, 2006. "Flat tax reforms: a general equilibrium evaluation for Spain," Investigaciones Economicas, Fundación SEPI, vol. 30(2), pages 317-351, May.
    12. Di Nola, Alessandro & Kocharkov, Georgi & Vasilev, Aleksandar, 2016. "Productivity, Taxation and Evasion: A Quantitative Exploration of the Determinants of the Informal Economy," EconStor Preprints 144164, ZBW - German National Library of Economics.
    13. Lopez-Daneri, Martin, 2016. "NIT picking: The macroeconomic effects of a Negative Income Tax," Journal of Economic Dynamics and Control, Elsevier, vol. 68(C), pages 1-16.
    14. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2014. "Income Taxation of U.S. Households: Facts and Parametric Estimates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 559-581, October.
    15. Remzi Kaygusuz, 2010. "Taxes and Female Labor Supply," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 725-741, October.

    More about this item

    Keywords

    Flat-tax reforms; Efficiency; Inequality; Earnings distribution; Income distribution;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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