Discussion Paper Details

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Title: Flat Tax Reforms: Investment Expensing and Progressivity

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

Publication Date: February 2011

Keyword(s): Efficiency, Flat-tax reforms, Inequality and Progressivity

Programme Area(s): International Macroeconomics and Public Economics

Abstract: In this article we quantify the aggregate, distributional and welfare consequences of investment expensing and progressivity in flat-tax reforms of the United States economy. We find that investment expensing as in the Hall and Rabushka type of reform brings about sizable output gains and a non-trivial increase in after-tax income inequality. But we also find that it results in large aggregate welfare gains in steady-state. Two additional flat-tax reforms with full investment expensing and varying degrees of progressivity reveal that the distributional role of the tax-exemption in the labor income tax is limited. But we also find that the progressivity of the reforms matters for welfare: economies with more progressive consumption-based flat-taxes are good for the very poor and are ultimately preferred by a Benthamite social planner because they allow households to do more consumption and leisure smoothing. Our findings suggest that moving towards a progressive consumption-based flat tax scheme could achieve the goals of raising government income, stimulating the economy and providing a safety net for the households that have been hit the hardest by the recession

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Bibliographic Reference

Díaz-Giménez, J and Pijoan-Mas, J. 2011. 'Flat Tax Reforms: Investment Expensing and Progressivity'. London, Centre for Economic Policy Research.