Tax distortions in Sweden and the United States

We calculate the welfare costs of distortionary taxation (including inflation) in models calibrated for the United States and Sweden. The welfare costs are calculated using comparative steady state as well as dynamic analysis, where we take the costs of transition from the distorted to the optimal steady state into account. We also calculate the welfare costs of adding stochastic fluctuations. Our main finding is that the total welfare costs of the distortionary taxes including the distortionary effects of inflation are about five times higher in Sweden than in the United States. Meanwhile, stochastic fluctuations in policy turn out to have a relatively small impact on welfare.