TY - JOUR

T1 - Consumption taxes and economic efficiency with idiosyncratic wage shocks

AU - Nishiyama, Shinichi

AU - Smetters, Kent

PY - 2005/10

Y1 - 2005/10

N2 - Fundamental tax reform is examined in an overlapping-generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty. A progressive income tax is replaced with a flat consumption tax. If idiosyncratic wage shocks are insurable (i.e., no risk), this reform improves (interim) efficiency, a result consistent with the previous literature. But if, more realistically, wage shocks are uninsurable, this reform reduces efficiency, even though national wealth and output increase over the entire transition path. This efficiency loss, in large part, stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system.

AB - Fundamental tax reform is examined in an overlapping-generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty. A progressive income tax is replaced with a flat consumption tax. If idiosyncratic wage shocks are insurable (i.e., no risk), this reform improves (interim) efficiency, a result consistent with the previous literature. But if, more realistically, wage shocks are uninsurable, this reform reduces efficiency, even though national wealth and output increase over the entire transition path. This efficiency loss, in large part, stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system.

KW - overlapping generations

KW - tax reform

KW - consumption taxes

U2 - 10.1086/432137

DO - 10.1086/432137

M3 - Journal article

VL - 113

SP - 1088

EP - 1115

JO - Journal of Political Economy

JF - Journal of Political Economy

SN - 0022-3808

IS - 5

ER -