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How regressive are indirect taxes? A microsimulation analysis for five European countries

Author

Listed:
  • André Decoster

    (Professor, University of Leuven, Belgium)

  • Jason Loughrey

    (Ph.D. student, Rural Economy Research Centre, Teagasc, Ireland)

  • Cathal O'Donoghue

    (Head, Rural Economy Research Centre, Teagasc, Ireland)

  • Dirk Verwerft

    (Research Assistant, University of Leuven, Belgium)

Abstract

Shifting the tax burden from labor to consumption is proposed in many developed countries as a way to make the tax system more incentive compatible. This article deals with the simulation of such a policy change to sharpen the distributional picture. Expenditures are imputed into the EUROMOD microsimulation program. Then social security contributions are lowered and the standard VAT rate is increased to maintain government revenue neutrality. The main conclusions are that (1) indirect taxes are regressive with respect to disposable income but proportional or progressive with respect to total expenditures, and (2) indirect taxes are in any case less progressive than other components of the tax system, making the proposed measure a regressive one. A possible solution exists in increasing the progressivity of the remaining income tax. © 2010 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
    • Handle: RePEc:wly:jpamgt:v:29:y:2010:i:2:p:326-350
    DOI: 10.1002/pam.20494
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    References listed on IDEAS

    as
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