Working Paper: CEPR ID: DP5812
Authors: Javier Daz-Gimenez; Josep Pijoan-Mas
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: Earnings Distribution; Efficiency; Flat Tax Reforms; Income Distribution; Inequality; Wealth Distribution
JEL Codes: D31; E62; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less progressive flat tax reform (H29) | 24% increase in steady-state output (E23) |
| less progressive flat tax reform (H29) | more unequal distribution of after-tax income (D31) |
| more progressive flat tax reform (H29) | 26% reduction in steady-state output (C69) |
| more progressive flat tax reform (H29) | more egalitarian distribution of after-tax income (D39) |
| less progressive flat tax reform (H29) | decline in aggregate welfare by 0.17% of consumption (D69) |
| more progressive flat tax reform (H29) | increase in aggregate welfare by 0.45% of consumption (D69) |
| less progressive flat tax reform (H29) | increase in Gini index of after-tax income (D31) |
| more progressive flat tax reform (H29) | decrease in Gini index of after-tax income (D31) |
| more progressive flat tax reform (H29) | welfare gains for 70% of households in the bottom 40% of the income distribution (H53) |