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 governmentto each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reductionin her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generationseconomy, calibrated to match several features of the US income, taxes and wealth distributions. Undersimple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions, it benefitsa significant fraction of the population and leads to sizable increases in aggregate labor supply, incomeand consumption....