Labor Supply Responses and Welfare Effects from Replacing Current Tax Rules by a Flat Tax: Empirical Evidence from Italy, Norway and Sweden

Posted: 4 Sep 2001

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Ugo Colombino

University of Turin - Department of Economics

Steinar Strøm

University of Oslo - Ragnar Frisch Centre for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This paper employs a microeconometric framework to examine the labor supply responses and the welfare effects from replacing current tax systems in Italy, Norway and Sweden by a flat tax on total income. The flat tax rates are determined so that the tax revenues are equal to the revenues as of 1992. The flat tax rates vary from 23 percent in Italy, 25 percent in Norway, to 29 percent in Sweden. In all three countries the labor supply responses decline sharply with pre-reform disposable income. The results show that the efficiency costs of the current tax systems relative to a flat tax may be rather high in Norway and much lower, but positive, in Italy and Sweden. In all three countries "rich" households - defined by their pre-tax-reform income - tend to benefit (in terms of welfare) more than "poor" households. In Italy and Sweden a majority will lose from a shift to a flat tax, while in Norway a majority is predicted to win.

Keywords: Labor supply, taxation, microeconometrics, cross-country analysis

Suggested Citation

Aaberge, Rolf and Colombino, Ugo and Strøm, Steinar, Labor Supply Responses and Welfare Effects from Replacing Current Tax Rules by a Flat Tax: Empirical Evidence from Italy, Norway and Sweden. Available at SSRN: https://ssrn.com/abstract=257203

Rolf Aaberge (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

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

Deaprtment of Economics ( email )

Norway

Ugo Colombino

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

Steinar Strøm

University of Oslo - Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0317 Oslo
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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