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The long-term economic impact of the flat tax in Poland. CGE simulation under alternative assumptions

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  • Jakub Boratyński

    ()
    (University of Lodz, Faculty of Economics and Sociology, Department of Theory and Analyses of Economic Systems)

  • Jakub Borowski

    ()
    (Warsaw School of Economics, Collegium of World Economy, Department of Economics II)

Abstract

The purpose of this paper is to assess the long-term macroeconomic effects of introducing the flat personal income tax at the level of 18% in Poland. We perform the simulation on a static CGE (computable general equilibrium) model which helps track the reaction of the economy on the impulse arising from the change in the tax regime. We assume that the gap in government revenues arising from the flat tax introduction will be fully matched by cuts in government consumption. The literature suggests that the flat tax reform is likely to stimulate labor supply and capital expansion. The actual macroeconomic outcome largely depends on adjustment mechanisms at work – especially the driving force of investment. If the increased household savings were to be fully transformed into investment, GDP gain of 0.7−0.9% is observed, otherwise this effect is dampened to 0–0.2%. The tax regime change in the analyzed form will deepen inequality and is likely to reduce welfare of some (particularly low-income) households.

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Bibliographic Info

Article provided by National Bank of Poland, Economic Institute in its journal Bank i Kredyt.

Volume (Year): 43 (2012)
Issue (Month): 3 ()
Pages: 5-30

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Handle: RePEc:nbp:nbpbik:v:43:y:2012:i:3:p:5-30

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Keywords: CGE modeling; flat tax;

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References

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  1. Edmund S. Phelps, 2002. "Income tax cuts without spending cuts: Hazards to efficiency, equity, employment and growth," Discussion Papers 0102-13, Columbia University, Department of Economics.
  2. Michael Keen & Alexander Klemm & Anna Ivanova, 2005. "The Russian Flat Tax Reform," IMF Working Papers 05/16, International Monetary Fund.
  3. Bargain, Olivier & Orsini, Kristian & Peichl, Andreas, 2011. "Labor Supply Elasticities in Europe and the US," IZA Discussion Papers 5820, Institute for the Study of Labor (IZA).
  4. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2011. "Optimal top marginal tax rates under income splitting for couples," CEPR Discussion Papers 8435, C.E.P.R. Discussion Papers.
  5. Immervoll, Herwig & Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare Reform in European Countries: A Micro-Simulation Analysis," CEPR Discussion Papers 4324, C.E.P.R. Discussion Papers.
  6. Aidt, Toke S. & Dutta, Jayasri, 2007. "Policy myopia and economic growth," European Journal of Political Economy, Elsevier, vol. 23(3), pages 734-753, September.
  7. Majcen, Boris & Verbic, Miroslav & Cok, Mitja, 2007. "The Income Tax Reform in Slovenia: Should the Flat Tax Have Prevailed?," MPRA Paper 10348, University Library of Munich, Germany.
  8. Adams, Philip D., 2005. "Interpretation of results from CGE models such as GTAP," Journal of Policy Modeling, Elsevier, vol. 27(8), pages 941-959, November.
  9. Nickel, Christiane & Vansteenkiste, Isabel, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series 0935, European Central Bank.
  10. Dixon, Peter B. & Parmenter, B.R., 1996. "Computable general equilibrium modelling for policy analysis and forecasting," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 1, pages 3-85 Elsevier.
  11. Michiel Evers & Ruud Mooij & Daniel Vuuren, 2008. "The Wage Elasticity of Labour Supply: A Synthesis of Empirical Estimates," De Economist, Springer, vol. 156(1), pages 25-43, March.
  12. repec:ese:emodwp:em9-09 is not listed on IDEAS
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