DP5812 Flat Tax Reforms in the US: A Boon for the Income Poor

Author(s): Javier Díaz-Giménez , Josep Pijoan-Mas

Publication Date: September 2006

Keyword(s): flat-tax reforms , efficiency , inequality , earnings distribution , income distribution , wealth distribution

JEL(s): D31 , E62 , H23

Programme Areas: International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP5812.asp.asp

In this article we quantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4% increase in steady state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6% reduction in steady state output and a distribution of after-tax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17% of consumption, and in the more progressive flat-tax economy it increases by 0.45% of consumption. In both flat-tax reforms the income poor pay less income taxes and obtain sizeable welfare gains.