Flat tax reforms in the U.S.: A boon for the income poor

In this article we quantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4 percent increase in steady-state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6 percent reduction in steady-state output and a distribution of aftertax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17 percent of consumption, and in the more progressive flat-tax economy it increases by 0.45 percent of consumption. In both flattax reforms the income poor pay less income taxes and obtain sizeable welfare gains