Analyzing a Flat Income Tax in the Netherlands
AbstractA 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.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-029/3.
Date of creation: 21 Mar 2007
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Flat tax; Labour market; General equilibrium; Equity; Optimal taxation;
Other versions of this item:
- D3 - Microeconomics - - Distribution
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-26 (All new papers)
- NEP-EEC-2007-05-26 (European Economics)
- NEP-LAB-2007-05-26 (Labour Economics)
- NEP-PBE-2007-05-26 (Public Economics)
- NEP-PUB-2007-05-26 (Public Finance)
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