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Replacing the U.S. Income Tax with a Progressive Consumption Tax : A Sequenced General Equilibrium Approach
Journal of Public Economics (1983)
  • Don Fullerton, University of Illinois at Urbana-Champaign
  • John B. Shoven, Stanford University
  • John Whalley, University of Western Ontario
This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations. We find the discounted present value of the stream of net gains is approximately $650 billion in 1973 dollars, just over 1 percent of the discounted present value of national income. Larger gains occur if further reform of capital income taxation accompanies the change. We examine the sensitivity of the results, both to the design of the consumption tax and to the values of elasticity and other parameters. The paper also contains estimates of the time required to adjust from one growth path to the other.
Publication Date
February, 1983
Citation Information
Don Fullerton, John B. Shoven and John Whalley. "Replacing the U.S. Income Tax with a Progressive Consumption Tax : A Sequenced General Equilibrium Approach" Journal of Public Economics Vol. 20 (1983)
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