Wednesday, May 31, 2006

U.S. Treasury on Tax Reform

A new study from the U.S. Treasury examines how tax reform could promote capital accumulation and economic growth. An excerpt:

The President’s Advisory Panel on Federal Tax Reform (the Tax Panel) released its report on reform of the federal income tax on November 1, 2005. The Tax Panel unanimously recommended two reform options: the Simplified Income Tax (SIT) and the Growth and Investment Tax (GIT). Both reform options are a hybrid of an income and consumption based tax. The Tax Panel also extensively examined a Progressive Consumption Tax (PCT). The Treasury Department’s Office of Tax Analysis (OTA) provided estimates to the Tax Panel on the likely growth effects for each of these plans....

All of these models predict that fundamental tax reform could lead to substantial increases in the national capital stock and national income. For example, the models suggest that the GIT recommended by the Tax Panel could lead to long-run increases in the capital stock ranging from 5.6 to 20.4 percent and long-run increases of national income ranging from 1.4 to 4.8 percent. The simulated growth effects of the SIT plan were considerably smaller, with long-run increases in the capital stock ranging from 0.9 to 2.3 percent and national income increases ranging from 0.2 to 0.9 percent. The growth effects of the PCT were the largest of the three plans, with long-run increases in the capital stock ranging from 8.0 to 27.9 percent, and long-run increases in national income ranging from 1.9 to 6.0 percent.