A Belgian Flat Income Tax: Effects on Labour Supply and Income Distribution

32 Pages Posted: 2 Feb 2009

See all articles by André Decoster

André Decoster

Department of Economics KU Leuven

Kris De Swerdt

KU Leuven - Faculty of Business and Economics (FEB)

Kristian Orsini

KU Leuven

Date Written: August 2008

Abstract

The adverse distributional effects of a flat tax are well known and have been documented by empirical research in several countries, including Belgium. Advocates of the flat tax argue, correctly, that these studies do not take into account agents' behavioural reactions and possible feed back effects. One of the important effects in this context is the potential increase in labour supply and the resulting increase in the taxable base and decrease in unemployment allowances. In this study we calculate the cost recovery based on a micro-simulation model that includes a labour supply model.

We find that there is indeed a clearly positive effect on labour supply and hence also on the tax base. By introducing a revenue-neutral flat tax, labour supply increases by approximately 47,000 full-time equivalents. However, the effect is limited because, compared to a static scenario the cost recovery only allows the revenue-neutral flat tax to decrease from 38.5% to 37%. Furthermore, there is little or no impact of these employment effects on the strongly regressive nature of a flat tax reform

Suggested Citation

Decoster, André and De Swerdt, Kris and Orsini, Kristian, A Belgian Flat Income Tax: Effects on Labour Supply and Income Distribution (August 2008). Available at SSRN: https://ssrn.com/abstract=1296633 or http://dx.doi.org/10.2139/ssrn.1296633

André Decoster (Contact Author)

Department of Economics KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.andredecoster.be

Kris De Swerdt

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Kristian Orsini

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

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