Investment expensing and progressivity in flat-tax reforms

Artikel

In this article we quantify the aggregate, distributional and welfare consequences of investment expensing and progressivity in Hall and Rabushka type of flat-tax reforms of the US economy. To do so we use a heterogeneous households model featuring both life cycle and dynastic elements as well as nonlinear wage dynamics. Our findings suggest that moving toward 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. In particular, we find that investment expensing brings about sizeable output gains and a nontrivial increase in after-tax income inequality. However, it results in aggregate welfare gains in steady state because the large deduction in the labor income tax acts as a boon for the income poor, because the larger capital stock implies that workers earn higher wages, and because investment expensing allows households to abandon poverty faster. We also find that the progressivity of the reforms matters for welfare: economies with more progressive flat-tax schemes are better for the very poor and are ultimately preferred by a Benthamite social planner as they allow households to achieve better consumption smoothing and a better allocation of their work effort across time and states.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: SERIEs - Journal of the Spanish Economic Association ; ISSN: 1869-4195 ; Volume: 10 ; Year: 2019 ; Issue: 3/4 ; Pages: 365-399

Classification and Topics

• Classification: Wirtschaft ; Personal Income, Wealth, and Their Distributions ; Fiscal Policy ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
• Subject: Flat-tax reforms ; Efficiency ; Inequality ; Earnings distribution ; Income distribution ; Wealth distribution

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Díaz-Giménez, Javier ; Pijoan-Mas, Josep
• Event: Veröffentlichung
• (who): Springer
• (where): Heidelberg
• (when): 2019

Further information

• DOI: doi:10.1007/s13209-019-0193-9
• Last update: 10.03.2025, 11:42 AM CET