Flat Tax Reforms in the Us: A Boon for the Income Poor
49 Pages Posted: 12 Oct 2006
Date Written: September 2006
In this article we quantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4% increase in steady state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6% reduction in steady state output and a distribution of after-tax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17% of consumption, and in the more progressive flat-tax economy it increases by 0.45% of consumption. In both flat-tax reforms the income poor pay less income taxes and obtain sizeable welfare gains.
Keywords: Flat-tax reforms, efficiency, inequality, earnings distribution, income distribution, wealth distribution
JEL Classification: D31, E62, H23
Suggested Citation: Suggested Citation