The Looming Fiscal Reckoning: Tax Distortions, Top Earners, and Revenues

Nezih Guner, Martin Lopez-Daneri () and Gustavo Ventura ()
Additional contact information
Martin Lopez-Daneri: Virginia Commonwealth University, https://vcu.edu/
Gustavo Ventura: Arizona State University, https://www.asu.edu/

Working Papers from CEMFI

Abstract: How should the U.S. confront the growing revenue needs driven by higher spending requirements? We investigate the mix of potential tax increases that generate a given revenue need at the minimum welfare cost and evaluate its macroeconomic impact. We do so in the context of a life-cycle growth model that captures key aspects of the earnings and wealth distributions and the non-linear shape of taxes and transfers in place. Our findings show that a proportional consumption tax combined with a lump-sum transfer to all households and a reduction in income tax progressivity consistently emerges as the best alternative to minimize welfare costs associated with a given increase in revenue. A 30% long-run increase in Federal tax revenue requires a consumption tax rate of 27.8%, a transfer of about 12% of mean household income to all households, and a reduction of top marginal income tax rates of more than 5 percentage points—output declines by 7.9% in the long run. While transfers are substantial, smaller transfers can accomplish most of the reduction in welfare costs. We find no role for wealth taxes in increasing revenues or minimizing welfare costs.

Keywords: Taxation; progressivity; tax revenue. (search for similar items in EconPapers)
JEL-codes: E6 H2 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Related works:
Journal Article: The Looming Fiscal Reckoning: Tax Distortions, Top Earners, and Revenues (2023)
Working Paper: The Looming Fiscal Reckoning: Tax Distortions, Top Earners, and Revenues (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2023_2305

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