Growth Effects of Shifting from a Graduated-rate Tax System to a Flat Tax |
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| Authors: | Steven P. Cassou Kevin J. Lansing |
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| Affiliation: | Cassou:;Associate Professor, Department of Economics, Kansas State University, 327 Waters Hall, Manhattan, KS 66506. Phone 1–785–532–6342, Fax 1–785–532–6919, E-mail Lansing:;Senior Economist, Research Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, CA 94120–7702. Phone 1–415–974–2393, Fax 1–415–977–4031, E-mail |
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| Abstract: | We compute the growth effects of adopting a revenue-neutral flat tax for both a human capital–based endogenous growth model and a standard neoclassical growth model. Long-run growth effects are decomposed into the parts attributable to the flattening of the marginal tax schedule, the full expensing of physical-capital investment, and the elimination of double taxation of business income. The most important element of the reform is the flattening of the marginal tax schedule. Without this element, the combined effects of the other parts of the reform can actually reduce long-run growth. In the years immediately following the reform, the transition dynamics implied by the neoclassical growth model are quite similar to that of the endogenous growth model. (JEL E62 , H21 ) |
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