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

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Author Info

  • 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.

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File URL: http://hdl.handle.net/10.1002/pam.20494
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Policy Analysis and Management.

Volume (Year): 29 (2010)
Issue (Month): 2 ()
Pages: 326-350

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Handle: RePEc:wly:jpamgt:v:29:y:2010:i:2:p:326-350

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Web page: http://www3.interscience.wiley.com/journal/34787/home

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References

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  1. Bruce D. Meyer & James X. Sullivan, 2003. "Measuring the Well-Being of the Poor Using Income and Consumption," NBER Working Papers 9760, National Bureau of Economic Research, Inc.
  2. Robin Boadway & Pierre Pestieau, 2002. "Indirect Taxation and Redistribution: The Scope of the Atkinson-Stiglitz Theorem," Working Papers, Queen's University, Department of Economics 1005, Queen's University, Department of Economics.
  3. John Sabelhaus & Jeffrey A. Groen, 2000. "Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 431-438, August.
  4. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 771-799, September.
  5. James M. Poterba, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," NBER Working Papers 2833, National Bureau of Economic Research, Inc.
  6. Bosch, L. H. M. & van den Noord, P. J., 1990. "Alternative financing of social insurance systems," Journal of Policy Modeling, Elsevier, Elsevier, vol. 12(1), pages 61-76.
  7. André Decoster, 2005. "How progressive are indirect taxes in Russia?," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 13(4), pages 705-729, October.
  8. Decoster, Andre & Schokkaert, Erik & Van Camp, Guy, 1997. "Is redistribution through indirect taxes equitable?," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 599-608, April.
  9. Neil Warren, 2008. "A Review of Studies on the Distributional Impact of Consumption Taxes in OECD Countries," OECD Social, Employment and Migration Working Papers 64, OECD Publishing.
  10. Sutherland, Holly & Immervoll, Herwig & O'Donoghue, Cathal, 1999. "An introduction to EUROMOD," EUROMOD Working Papers EM0/99, EUROMOD at the Institute for Social and Economic Research.
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Cited by:
  1. Gabriele Ballarino & Francesco Bogliacino & Michela Braga & Massimiliano Bratti & Daniele Checchi & Antonio Filippin & Virginia Maestri & Elena Meschi & Francesco Scervini, 2012. "GINI Intermediate Report WP 3: Drivers of Growing Inequality," GINI Discussion Papers, AIAS, Amsterdam Institute for Advanced Labour Studies wp3, AIAS, Amsterdam Institute for Advanced Labour Studies.
  2. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers, Herman Deleeck Centre for Social Policy, University of Antwerp 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.
  3. Callan, Tim & Leventi, Chrysa & Levy, Horacio & Matsaganis, Manos & Paulus, Alari & Sutherland, Holly, 2011. "The distributional effects of austerity measures: a comparison of six EU countries," EUROMOD Working Papers EM6/11, EUROMOD at the Institute for Social and Economic Research.
  4. Nico Pestel & Eric Sommer, 2013. "Shifting Taxes from Labor to Consumption: Efficient, but Regressive?," SOEPpapers on Multidisciplinary Panel Data Research 624, DIW Berlin, The German Socio-Economic Panel (SOEP).
  5. Kenneth A. Couch & Maureen A. Pirog, 2010. "Poverty measurement in the U.S., Europe, and developing countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 29(2), pages 217-226.
  6. Francesco Figari & Paulus, A. (Alari), 2012. "GINI DP 28: The impact of indirect taxes and imputed rent on inequality: A comparison with cash transfers and direct taxes in five EU countries," GINI Discussion Papers, AIAS, Amsterdam Institute for Advanced Labour Studies 28, AIAS, Amsterdam Institute for Advanced Labour Studies.
  7. Sutherland, Holly & Figari, Francesco, 2013. "EUROMOD: The European Union Tax-Benefit Microsimulation Model," EUROMOD Working Papers EM8/13, EUROMOD at the Institute for Social and Economic Research.
  8. Cathal O’Donoghue & Jason Loughrey & Karyn Morrissey, 2013. "Using the EU-SILC to model the impact of the economic crisis on inequality," IZA Journal of European Labor Studies, Springer, Springer, vol. 2(1), pages 1-26, December.
  9. Matsaganis, Manos & Leventi, Chrysa, 2011. "The distributional impact of the crisis in Greece," EUROMOD Working Papers EM3/11, EUROMOD at the Institute for Social and Economic Research.
  10. Leventi, Chrysa & Matsaganis, Manos, 2013. "Distributional implications of the crisis in Greece in 2009-2012," EUROMOD Working Papers EM14/13, EUROMOD at the Institute for Social and Economic Research.
  11. Andre Decoster & Xavier Flawinne & Pieter Vanleenhove, 2012. "General accounting in Belgium: Fiscal sustainability at a glance," CREPP Working Papers 1203, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
  12. Figari, Francesco & Paulus, Alari, 2013. "The distributional effects of taxes and transfers under alternative income concepts: the importance of three ‘I’s," EUROMOD Working Papers EM15/13, EUROMOD at the Institute for Social and Economic Research.
  13. Tim Rie & Ive Marx, 2013. "GINI Country Report: Growing Inequalities and their Impacts in Belgium," GINI Country Reports, AIAS, Amsterdam Institute for Advanced Labour Studies belgium, AIAS, Amsterdam Institute for Advanced Labour Studies.
  14. Arsić, Milojko & Altiparmakov, Nikola, 2013. "Equity aspects of VAT in emerging European countries: A case study of Serbia," Economic Systems, Elsevier, Elsevier, vol. 37(2), pages 171-186.

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