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American Economic Review: Vol. 91 No. 3 (June 2001)


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Simulating Fundamental Tax Reform in the United States

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Altig, David, Alan J. Auerbach, Laurence J. Koltikoff, Kent A. Smetters, and Jan Walliser. 2001. "Simulating Fundamental Tax Reform in the United States." American Economic Review, 91(3): 574-595.

DOI: 10.1257/aer.91.3.574


This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest.

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Altig, David (Federal Reserve Bank of Cleveland)
Auerbach, Alan J. (U CA, Berkley)
Koltikoff, Laurence J. (Boston U)
Smetters, Kent A. (U PA)
Walliser, Jan (IMF)

JEL Classifications

E62: Fiscal Policy
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H30: Fiscal Policies and Behavior of Economic Agents: General

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