Working Paper: NBER ID: w9477
Authors: Roger Gordon; Laura Kalambokidis; Joel Slemrod
Abstract: The U.S. income tax has long been recognized as a hybrid of an income and consumption tax, with elements that do not fit naturally into either pure system. The precise nature of this hybrid has important policy implications for, among other things, understanding the impact of moving closer to a pure consumption tax regime. In this paper, we examine the nature of the U.S. income tax by calculating the revenue and distributional implications of switching from the current system to one form of consumption tax, a modified cash flow tax. Although earlier work had suggested that in 1983 such a switch would have cost little or no revenue at all, we calculate that in 1995 this switch would have cost $108.1 billion in tax revenues, suggesting that the U.S. income tax does impose some positive tax on capital income. The net gains from such a switch have a U-shaped pattern, with those in the lowest and highest deciles of labor income receiving the largest proportional gains, although those in the highest decile would have by far the largest absolute gains.
Keywords: No keywords provided
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existing tax system (H29) | Revenue generation from capital income (D33) |
| Switching to modified cash flow tax in 1995 (H29) | Loss of tax revenues (H26) |
| Existing tax treatment of capital income (H24) | Efficiency losses (D61) |
| Existing tax treatment of capital income (H24) | Distributional gains justification (D63) |
| Net gains from switching to consumption tax (H29) | U-shaped pattern of gains (F12) |