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Economic Quarterly

Winter 2007

Implications of Some Alternatives to Capital Income Taxation

Kartik B. Athreya and Andrea L. Waddle

In this article, we study the long-run implications of a switch from current U.S. tax policy, which features taxes on labor income, capital income, and consumption, to several alternative systems. These alternatives are revenue-neutral switches to 1) a national sales tax on consumption alone, 2) a pure labor income tax, 3) a combination of consumption taxes and capital income taxes, and 4) a combination of labor taxes and capital income taxes. Our findings suggest that income risk is important to consider when contemplating alternatives to capital income taxes, and that tax reforms may be viewed rather differently by households that differ in wealth and/or current labor productivity.

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