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Working Paper

Growth Effects of a Flat Tax

This paper develops a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by Hall and Rabushka (1985, 1995). Using parameters calibrated to match the progressivity of the U.S. federal tax schedule and other features of the U.S. economy, we find that a revenue neutral flat tax can permanently increase per capita growth by 0.18 to 0.85 percentage points per year. Both features of a flat tax—the lower marginal tax rate and the full investment write-off—are important contributors to the growth gain. The strength of the growth effect depends on: (1) the elasticity of household labor supply, (2) capital’s share of output, and (3) the elasticity of the capital stock with respect to new investment.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Cassou, Steven P., and Kevin Lansing. 1996. “Growth Effects of a Flat Tax.” Federal Reserve Bank of Cleveland, Working Paper No. 96-15.