Working Paper: NBER ID: w0819
Authors: Alan J. Auerbach; Laurence J. Kotlikoff; Jonathan Skinner
Abstract: This paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general. equilibrium rational expectations growth path of life cycle economies. The principal findings concern the effects of switching from a proportional income tax with rates similar to those in the U.S. to either a proportional tax on consumption or a proportional tax on labor income. A switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources. In contrast, a transition to wage taxation generates a loss of greater than ? percent of lifetime re- sources. A second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost.
Keywords: Dynamic Tax Reform; Efficiency Gains; Welfare Effects; Proportional Taxation; Progressive Taxation
JEL Codes: H21; H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Proportional income tax (H29) | Lifetime resources (Q21) |
| Consumption tax (H25) | Lifetime resources (Q21) |
| Wage tax (J31) | Lifetime resources (Q21) |
| Progressive income tax (H29) | Efficiency costs (D61) |
| Tax structure changes (H29) | Welfare outcomes (I38) |