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Federal Reserve Bank of San Francisco
Working Paper Series
Growth effects of shifting from a progressive tax system to a flat tax
Steven P. Cassou
Kevin J. Lansing
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.


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Steven P. Cassou & Kevin J. Lansing, Growth effects of shifting from a progressive tax system to a flat tax, Federal Reserve Bank of San Francisco, Working Paper Series 2000-15, 2002.
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Keywords: Fiscal policy ; Flat-rate income tax ; Human capital
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