Flat Tax Reforms in the Us: A Boon for the Income Poor

49 Pages Posted: 12 Oct 2006

See all articles by Javier Díaz Giménez

Javier Díaz Giménez

Universidad Carlos III de Madrid - Department of Economics

Josep Pijoan-Mas

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Date Written: September 2006

Abstract

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

Díaz Giménez, Javier and Pijoan-Mas, Josep, Flat Tax Reforms in the Us: A Boon for the Income Poor (September 2006). CEPR Discussion Paper No. 5812. Available at SSRN: https://ssrn.com/abstract=936973

Javier Díaz Giménez

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9585 (Phone)
+34 91 624 9875 (Fax)

Josep Pijoan-Mas (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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