The long-run dynamics of fundamental tax reform

Article Abstract:

A revised intertemporal equilibrium model is used to examine the effects of fundamental tax reform on the long-run dynamics of the economic development in the US. The existing corporate and individual income taxes at the local, state and federal levels are replaced with a flat-rate consumption tax and a flat-rate income-base value-added tax. The economic effects of these alternative options to tax reform are modest. A flat-rate consumption tax raises gross domestic product (GDP) by nearly 3.3% while a flat-rate income tax raises the GDP by less than 0.7% in the first year.

United States economic conditions, Flat tax

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Potential disruption from the move to a consumption tax

Article Abstract:

The adoption of a consumption tax may result in possible disruptions. Price levels and the after-tax interest rate may increase while value of housing may decrease. Compared with consumption goods, the value of capital goods may decrease because of a decrease in tax. Such disruptions must be considered in the design of tax reform proposals. While other disruptions are innate to consumption tax, a sensible design can eliminate some disruptions.

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