The Efficiency and Welfare Effects of Tax Reform: Are Fewer Tax Brackets Better than More?
On the wish list of many members of the new Congress is an income tax system characterized by constant marginal tax rates, typically referred to as a flat-tax system. In reality, what we are likely to see is a continuation of the worldwide trend toward replacing systems with high marginal-rate progressivity with those that have a smaller number of rates that are flat over relatively broad income ranges. In this article, the authors compare a simple two-bracket tax code with an approximation to traditional structures that entail steeply rising marginal tax rates. Their conclusion - that the simpler rate structures are not necessarily more efficient than alternatives with numerous, highly progressive brackets - serves as a cautionary note to potential reformers.
Suggested citation: Altig, David, and Charles Carlstrom. “The Efficiency and Welfare Effects of Tax Reform: Are Fewer Tax Brackets Better than More?,” Federal Reserve Bank of Cleveland, Economic Review, vol. 30, no. 4, pp. 30-42, 12.01.1994.