Working Paper: NBER ID: w0892
Authors: Don Fullerton; John B. Shoven; John Whalley
Abstract: This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations. We find that the discounted present value of the stream of net gains is approximately $650 billion in 1973 dollars, just over one percent of the discounted present value of national income. Larger gains occur if further reform of capital income taxation accompanies the change. We examine the sensitivity of the results, both to the design of the consumption tax and to the values of elasticity and other parameters. The paper also contains estimates of the time required to adjust from one growth path to the other.
Keywords: progressive consumption tax; income tax; general equilibrium model; welfare consequences
JEL Codes: H21; H24; D58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switch from income tax to progressive consumption tax (H29) | increased savings (D14) |
| increased savings (D14) | capital stock grows (E22) |
| capital stock grows (E22) | consumption eventually surpasses original path (E20) |
| switch from income tax to progressive consumption tax (H29) | reduced consumption initially (E21) |
| switch from income tax to progressive consumption tax (H29) | discounted present value of net gains of approximately $650 billion (H43) |
| design of consumption tax and elasticity parameters (H30) | sensitivity of results (C52) |