The efficiency and welfare effects of tax reform: are fewer tax brackets better than more?

David Altig and Charles Carlstrom

No 78, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

Abstract: Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many small steps between tax rates with structures characterized by just a few large jumps is not easily accounted for by efficiency arguments. In the process of our analysis, we introduce a simple algorithm for solving dynamic fiscal policy models that include kinks in individual budget surfaces due to discrete tax codes. In addition to providing a relatively straightforward way of extending Auerbach-Kotlikoff-type models to this class of problems, our approach has the side benefit of facilitating the interpretation of our results.

Keywords: Taxation (search for similar items in EconPapers)
Date: 1992
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=76 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=76 [301 Moved Permanently]--> https://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=76)
http://www.minneapolisfed.org/research/DP/DP78.pdf

Related works:
Journal Article: The efficiency and welfare effects of tax reform: are fewer tax brackets better than more? (1994)
Working Paper: The efficiency and welfare effects of tax reform: are fewer tax brackets better than more? (1992)
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:fip:fedmem:78

Ordering information: This working paper can be ordered from
elaine.reed@mpls.frb.org

Access Statistics for this paper

More papers in Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Jannelle Ruswick (jannelle.ruswick@mpls.frb.org this e-mail address is bad, please contact repec@repec.org).