EVALUATION OF THE CONSUMPTION TAX WITH DYNAMIC GENERAL EQUILIBRIUM MODELS

The purpose of this dissertation is to use computational general equilibrium models to simulate the effects of adopting a consumption tax system in the United States. Two separate computational general equilibrium models are used. The two models employ the same structure of production, with 19 competitive industrial sectors. The main differences between the models are in the treatment of consumers.; The first model is a steady-state model with infinitely-lived consumers. It is used to evaluate the sensitivity of the results to different assumptions about consumer foresight. The simulation results indicate that adoption of the consumption tax would lead to welfare gains on the order of one percent of wealth. This is true regardless of whether consumers are assumed to be myopic or to be able to forecast relative price changes correctly far into the future. Foresight does have some effect, however. The results indicate that additional foresight can actually have a negative effect on welfare. This is because additional foresight can lead to less saving, and this exacerbates the existing distortions caused by the taxes on capital at the industry level. It is also shown that additional increments of foresight have decreasing marginal effects on welfare.; The second model is an overlapping-generations life-cycle model in which consumers derive utility from bequests. The sizes of the consumer groups are based on actual population projections. Because of the non-steady-state nature of the demographics, relative prices change endogenously, even in the absence of a tax policy change. Simulation results indicate that the relative price of capital services rises late in the twentieth century as the most numerous cohorts supply a great deal of labor. The trend reverses when the Baby Boom generation retires and dies. Simulations of the consumption tax indicate that it leads to welfare gains for all cohorts, including those which are old at the time of the policy change.; It appears that the adoption of a consumption tax would lead to welfare gains. This conclusion holds under a variety of different models of the United States economy.