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Analyzing a Flat Income Tax in the Netherlands

Author

Listed:
  • Ruud A. De Mooij
  • Bas Jacobs
  • Kees Folmer

Abstract

A flat tax rate on income has gained popularity in European countries. This paper assesses the attractiveness of such a flat tax in achieving redistributive objectives with the least cost to labour market performance. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms, matching frictions, and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. This finding bolsters the notion that a linear tax is less efficient than a non-linear tax to obtain redistributive goals.

Suggested Citation

  • Ruud A. De Mooij & Bas Jacobs & Kees Folmer, 2007. "Analyzing a Flat Income Tax in the Netherlands," CESifo Working Paper Series 1890, CESifo.
    • Handle: RePEc:ces:ceswps:_1890
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    References listed on IDEAS

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    Cited by:

    1. Peichl, Andreas & Paulus, Alari, 2008. "Effects of flat tax reforms in Western Europe on equity and efficiency," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-4, University of Cologne, FiFo Institute for Public Economics.
    2. Paulus, Alari & Peichl, Andreas, 2009. "Effects of flat tax reforms in Western Europe," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 620-636, September.
    3. Saša Randjelović & Jelena Žarković-Rakić, 2011. "Addressing Inequality And Poverty With Tax Instruments," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 56(190), pages 7-26, July – Se.

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    More about this item

    Keywords

    flat tax; labour market; general equilibrium; equity; optimal taxation;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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