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Implementing a Dual Income Tax in Germany:Effects on Investment and Welfare

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  • Doina Maria Radulescu
  • Michael Stimmelmayr

Abstract

This paper investigates the effects of implementing a dual income tax (DIT) in Germany. We follow the reform proposal of the German Council of Economic Advisors(2003) and analyze its implications on capital formation, investment and welfare using a dynamic computable general equilibrium model. The main features of the model are an intertemporal investment model and the traditional Ramsey model on the household side. Our findings suggest that the introduction of a DIT with a proportional capital income tax rate of 30% and progressive labour income tax rates up to 35% leads to higher investments, an increased capital accumulation up to 5.8% and welfare gains of about 1% of GDP.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-Ifo_Working_Papers/wp-ifo-2005-2010/IfoWorkingPaper-20.pdf
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Bibliographic Info

Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Papers No. 20.

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Date of creation: 2005
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Handle: RePEc:ces:ifowps:_20

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Related research

Keywords: Capital income taxation computable general equilibrium modelling welfare analysis.;

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  1. Roger H. Gordon & Young Lee, 1999. "Do Taxes Affect Corporate Debt Policy? Evidence from US Corporate Tax Return Data," NBER Working Papers 7433, National Bureau of Economic Research, Inc.
  2. Robin Boadway, 2004. "The Dual Income Tax System - An Overview," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 03-08, October.
  3. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
  4. Chirinko, Robert S., 2002. "Corporate Taxation, Capital Formation,and the Substitution Elasticity between Labor and Capital," National Tax Journal, National Tax Association, vol. 55(N. 2), pages 339-355, June.
  5. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, July.
  6. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers 164, International Monetary Fund.
  7. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
  8. Robert Fenge & Silke Uebelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo Group Munich.
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