NCPA - National Center for Policy Analysis

ECONOMIC CONSEQUENCES OF TAX REFORM

September 30, 2005

Moving to a consumption tax, whether implemented as a personal consumption tax, a value-added tax or a retail sales tax would cause a substantial increase in the nation's capital stock. This, in turn, would raise wages and real output compared to the current system, says the National Center for Policy Analysis (NCPA).

Specifically:

  • National income would be 6 percent higher than otherwise by 2030, and 9 percent higher by 2050.
  • Real wages would be 4 percent higher by 2030 and 6 percent higher by 2050.

In some ways, Social Security reform is even more important than tax reform because it avoids dramatic increases over time in payroll taxes that would otherwise be needed to pay benefits to the elderly, says the NCPA.

Without reform:

  • Taxes as a percent of national income will rise from 36 percent today to 46 percent by 2030 and 50 percent by the end of the century in the absence of any reform.
  • Average take-home pay for workers will be 26 percent lower by 2050 and 31 percent lower by the end of the century because of elderly entitlements.

Moreover, combining a consumption tax and Social Security reform creates very large and very progressive benefits for future generations, says the NCPA:

  • For individuals born in 1980 and newly entering the labor market today, families in the bottom third of the income distribution can expect a 13 percent increase in their lifetime standard of living, compared to less than 1 percent for those in the middle and less than 2 percent for those at the top.
  • For those to be born in 2030, the gains (relative to what otherwise would have happened) are 54 percent for the bottom third, 27 percent for those in the middle and 11 percent for those at the top.

Source: Hans Fehr, John C. Goodman, Sabine Jokisch and Laurence J. Kotlikoff, "Tax and Social Security Reform: Thinking Outside the Box," National Center for Policy Analysis, Policy Report No. 275, September 2005.

For text:

http://www.ncpa.org/pub/st275

 

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