Tax and Social Security Reform: Thinking Outside the Box
Modeling the Effects of Tax Reform
The model used here is state-of-the-art for estimating the macroeconomic consequences of tax reform, including estimates of the required tax rates; the impact on saving and investment decisions, real wages, and real interest rates; and the welfare consequences for broad classes of taxpayers grouped by income and age.25
The model does not, however, estimate certain microeconomic benefits of reform including (1) the gain from lowering the accounting, legal, administrative and other paperwork burdens of the current system; (2) the allocative gain from reducing incentives to over-consume particular goods and services, such as housing and medical services, which are favored by the current tax system, and (3) the gains from reducing the size of the underground economy. These unmeasured gains are likely to be very large.