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Simulating U.S. Tax Reform

Author

Listed:
  • David Altig
  • Alan J. Auerbach
  • Laurence J. Kotlikoff
  • Kent A. Smetters
  • Jan Walliser
Abstract
This paper uses a new large-scale dynamic simulation model to compare the equity, efficiency, and macroeconomic effects of five alternative to the current U.S. federal income tax. These reforms are a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the 'X tax.' The model incorporates intragenerational heterogeneity and kinked budget constraints. It predicts major macroeconomic gains (including an 11 percent increase in long-run output) from replacing the federal tax system with a proportional consumption tax. Future middle- and upper-income classes gain from this policy, but initial older generations are hurt by the policy's implicit capital levy. Poor members of current and future generations also lose. The The flat tax, which adds a standard deduction to the consumption tax, makes all members of future generations better off, but at a cost of halving the economy's long-run output gain and harming initial older generations. Insulating these older generations through transition relief further reduces transition relief further reduces the long-run gains from tax reform. Switching to a proportional income tax without deductions and exemptions hurts current and future low lifetime earners, but helps everyone else. It also raises long-run output by over 5 percent. The X tax makes everyone better off in the long-run and also raises long-run output by 7.5 percent. But it harms initial older generations who bear its implicit wealth tax.

Suggested Citation

  • David Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1997. "Simulating U.S. Tax Reform," NBER Working Papers 6248, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6248
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    References listed on IDEAS

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    1. Charles T. Carlstrom & David Altig, 1999. "Marginal Tax Rates and Income Inequality in a Life-Cycle Model," American Economic Review, American Economic Association, vol. 89(5), pages 1197-1215, December.
    2. John F. Henry & L. Randall Wray, 1998. "Economic Time," Macroeconomics 9811004, University Library of Munich, Germany.
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    2. Fehr, Hans & Ruocco, Anna, 1999. "Equity and efficiency aspects of the Italian debt reduction," Economic Modelling, Elsevier, vol. 16(4), pages 569-589, December.
    3. Fougère, Maxime & Harvey, Simon & Mercenier, Jean & Mérette, Marcel, 2009. "Population ageing, time allocation and human capital: A general equilibrium analysis for Canada," Economic Modelling, Elsevier, vol. 26(1), pages 30-39, January.
    4. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
    5. Peichl, Andreas, 2005. "Die Evaluation von Steuerreformen durch Simulationsmodelle," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 05-1, University of Cologne, FiFo Institute for Public Economics.
    6. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
    7. Ernst Fehr & Wolfgang Wiegard, 2001. "The Incidence of an Extended Ace Corporation Tax," CESifo Working Paper Series 484, CESifo.
    8. Edward N. Wolff & Ajit Zacharias, 2003. "The Levy Institute Measure of Economic Well-Being," Economics Working Paper Archive wp_372, Levy Economics Institute.
    9. Katharine Anderson & Eric French & Tina Lam, 2004. "You can't take it with you: asset run-down at the end of the life cycle," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 28(Q III), pages 40-54.
    10. Harry ter Rele, 2005. "Measuring lifetime redistribution in Dutch collective arrangements," CPB Document 79, CPB Netherlands Bureau for Economic Policy Analysis.
    11. repec:hal:spmain:info:hdl:2441/2091 is not listed on IDEAS
    12. Jacques Le Cacheux & Vincent Touzé, 2002. "Les modèles d'équilibre général calculable à générations imbriquées. Enjeux, méthodes et résultats," Revue de l'OFCE, Presses de Sciences-Po, vol. 80(1), pages 87-113.
    13. Kristina V. Nesterova, 2024. "Estimating the effect of Progressive Personal Income Tax Schedule for Russia in a global CGE-OLG model," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 10(2), pages 334-354.
    14. Smetters, Kent & Walliser, Jan, 2004. "Opting out of social security," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1295-1306, July.
    15. Hirte, Georg, 2001. "Pension Policies for an Aging Society," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 14, number urn:isbn:9783161475399, September.
    16. Lewis, Kenneth A. & Seidman, Laurence S., 2001. "The Consumption Tax and Transitional Relief," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 99-120, January.
    17. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-1694, September.
    18. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-1694, September.
    19. Jaime Acosta-Margain, 2011. "Tax-benefit incidence of value added tax on food and medicine to fund progressive social expenditure," Working Papers 194, ECINEQ, Society for the Study of Economic Inequality.
    20. Zodrow, George R., 1999. "The Sales Tax, the VAT, and Taxes in Between--or, Is the Only Good NRST a "VAT in Drag"?," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 429-42, September.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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