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Flat tax reform

  • Michael Smart

This paper studies the welfare effects of tax reforms moving in the direction of flat-rate taxation of income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, flat tax reforms are desirable when inter-commodity substitution effects are large relative to commodity--leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number msmart-98-01.

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Length: 12 pages
Date of creation: 02 Apr 1998
Date of revision:
Handle: RePEc:tor:tecipa:msmart-98-01
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Fane, George, 1991. "Piecemeal tax reforms and the compensated radial elasticities of tax bases," Journal of Public Economics, Elsevier, vol. 45(2), pages 263-270, July.
  2. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Hatta, Tatsuo, 1986. "Welfare effects of changing commodity tax rates toward uniformity," Journal of Public Economics, Elsevier, vol. 29(1), pages 99-112, February.
  4. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
  5. Gordon, James P. F., 1991. "Tax reform and uniformity : Explaining the Hatta result," Journal of Public Economics, Elsevier, vol. 45(2), pages 257-261, July.
  6. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
  7. Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September.
  8. Sadka, Efraim, 1977. "A theorem on uniform taxation," Journal of Public Economics, Elsevier, vol. 7(3), pages 387-391, June.
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