Neglected Effects on the Uses Side: Even a Uniform Tax Would Change Relative Goods Prices

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Fundamental tax reform may change relative prices of consumption goods and may therefore have important effects on the uses side that are ignored by most general equilibrium simulation models. For a uniform rate of tax, in our model, results on the uses side are driven by the nonuniform tax system being replaced. Similar effects occur under any uniform and comprehensive tax reform, whether the current system is replaced by a consumption tax, a wage tax, or a pure income tax. Any such reform that eliminates the current preferential treatment of housing would impose an additional one-time levy on the elderly, and any reform that eliminates the current double taxation of corporate capital would reduce the relative prices of corporate-capital-intensive goods bought by the poor.

Published: American Economic Review, vol.87, no.2, (May 1997): 120-125.

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