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

Nezih Guner, Martin Lopez-Daneri and Gustavo Ventura

No 17795, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 can 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. We evaluate changes in income taxes, the introduction of an economy-wide linear consumption tax, and a wealth tax for top wealth holders that match different revenue targets. 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 either increasing revenues or minimizing welfare costs.

Keywords: Taxation (search for similar items in EconPapers)
JEL-codes: E6 H2 (search for similar items in EconPapers)
Date: 2023-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17795 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17795

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17795

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().