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The Efficiency and Welfare Effects of Tax Reform: Are Fewer Tax Brackets Better than More?

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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.

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