Impact of a BBLR Tax System on Standard of Living in the United States: An OLG Approach

The debate about taxation matters remains relevant in the literature across schools of thoughts and decision-makers. Indeed, these matters carry far-reaching economic effects both domestically and internationally. Taxes can constitute major conduits for distortions and inefficiencies in the economy if not properly set and administered. This study explores the impact of a broad base lower rate (BBLR) tax system on lifetime standard of living in the United States. Toward that end, it considers a partial equilibrium framework in the form of a two-period overlapping generation (2- OLG) model with two groups of people: (i) the young or poor, and (ii) the old or rich. An empirical assessment of the theoretical model using carefully calibrated parameters shows that a BBLR, in the form of a flat effective tax rate, improves the lifetime consumption pattern of a typical economic agent. Considering that consumption averages about two-thirds of the US economy, it naturally suggests that the introduction of such a tax system will usher in a sustained boost to economic activities across all sectors