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Tax Buyouts

Staff Report 441 | Published March 31, 2010

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Fabrizio Perri Assistant Director and Monetary Advisor
Marco Del Negro Federal Reserve Bank of New York
Tax Buyouts


The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions, it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption.

Published in: _Journal of Monetary Economics_ (Vol. 57, No. 5, July 2010, pp. 576-595)