Working Paper: CEPR ID: DP8238
Authors: Javier Daz-Gimenez; Josep Pijoan-Mas
Abstract: In this article we quantify the aggregate, distributional and welfare consequences of investment expensing and progressivity in flat-tax reforms of the United States economy. We find that investment expensing as in the Hall and Rabushka type of reform brings about sizable output gains and a non-trivial increase in after-tax income inequality. But we also find that it results in large aggregate welfare gains in steady-state. Two additional flat-tax reforms with full investment expensing and varying degrees of progressivity reveal that the distributional role of the tax-exemption in the labor income tax is limited. But we also find that the progressivity of the reforms matters for welfare: economies with more progressive consumption-based flat-taxes are good for the very poor and are ultimately preferred by a Benthamite social planner because they allow households to do more consumption and leisure smoothing. Our findings suggest that moving towards a progressive consumption-based flat tax scheme could achieve the goals of raising government income, stimulating the economy and providing a safety net for the households that have been hit the hardest by the recession
Keywords: Efficiency; Flat-tax reforms; Inequality; Progressivity
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 |
|---|---|
| investment expensing in flat tax reforms (H32) | significant output gains (E23) |
| investment expensing in flat tax reforms (H32) | increase in after-tax income inequality (H29) |
| consumption-based flat tax (H29) | larger aggregate welfare gains (D69) |
| income-based flat tax (H29) | smaller output increase (E23) |
| progressivity of tax reforms (H29) | welfare outcomes (I38) |
| progressive tax codes (H29) | improve labor market outcomes (J48) |