The Total Welfare Cost of the United States Tax System: A General Equilibrium Approach

We use a computational general equilibrium model of the United States economy to examine the combined welfare cost of all taxes in the U.S. revenue system. We estimate that the present value of the gain from replacing the distortionary tax system with certain lump-sum taxes would be between 13 cents and 24 cents per dollar of revenue, depending on elasticity assumptions. Corporate taxes and income taxes generate the greatest welfare losses.搎Equalization of tax rates across sectors would lead to large gains, as would replacing the existing tax system with a consumption-type value-added tax.