Effects of Flat Tax Reforms in Western Europe on Income Distribution and Work Incentives

37 Pages Posted: 6 Oct 2008

See all articles by Alari Paulus

Alari Paulus

University of Essex - Institute for Social and Economic Research (ISER)

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

Abstract

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and efficiency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.

Keywords: flat tax reform, income distribution, work incentives, microsimulation

JEL Classification: C81, D31, H24

Suggested Citation

Paulus, Alari and Peichl, Andreas, Effects of Flat Tax Reforms in Western Europe on Income Distribution and Work Incentives. IZA Discussion Paper No. 3721. Available at SSRN: https://ssrn.com/abstract=1278921 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Alari Paulus (Contact Author)

University of Essex - Institute for Social and Economic Research (ISER) ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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