Abstract: This paper studies the welfare effects of tax reforms moving in the direction of flat-rate taxation of income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, flat tax reforms are desirable when inter-commodity substitution effects are large relative to commodity--leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures.
Keywords: uniform commodity taxation, tax reform
JEL Classification: H21