Growth Effects of a Flat Tax

35 Pages Posted: 10 Oct 2000

See all articles by Kevin J. Lansing

Kevin J. Lansing

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Steven P. Cassou

Kansas State University - Department of Economics

Date Written: September 14, 2000

Abstract

This paper develops a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by Hall and Rabushka (1995). Using parameters calibrated to match the progressivity of the U.S. tax schedule and other features of the U.S. economy, we compute the growth and level effects of adopting a revenue-neutral flat tax for both a human-capital based endogenous growth model and a standard neoclassical growth model. 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 corporate dividends. We find that 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.

JEL Classification: H21, E13, E62, O41

Suggested Citation

Lansing, Kevin J. and Cassou, Steven P., Growth Effects of a Flat Tax (September 14, 2000). Available at SSRN: https://ssrn.com/abstract=244537 or http://dx.doi.org/10.2139/ssrn.244537

Kevin J. Lansing (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
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Steven P. Cassou

Kansas State University - Department of Economics ( email )

Manhattan, KS 66502-4001
United States
785-532-6342 (Phone)
785-532-6919 (Fax)

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