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A Belgian flat income tax: effects on labour supply and income distribution

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  • André Decoster
  • Kris De Swerdt
  • Kristian Orsini

Abstract

The adverse distributional effects of a flat tax are well known and have been documented by empirical research in several countries, including Belgium. Advocates of the flat tax argue, correctly, that these studies do not take into account agents’ behavioural reactions and possible feed back effects. One of the important effects in this context is the potential increase in labour supply and the resulting increase in the taxable base and decrease in unemployment allowances. In this study we calculate the cost recovery based on a micro-simulation model that includes a labour supply model. We find that there is indeed a clearly positive effect on labour supply and hence also on the tax base. By introducing a revenue-neutral flat tax, labour supply increases by approximately 47,000 full-time equivalents. However, the effect is limited because, compared to a static scenario the cost recovery only allows the revenue-neutral flat tax to decrease from 38.5% to 37%. Furthermore, there is little or no impact of these employment effects on the strongly regressive nature of a flat tax reform.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0820.

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Date of creation: Aug 2008
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Handle: RePEc:ete:ceswps:ces0820

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  1. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration1," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  2. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
  3. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  4. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  5. Michael Keen & Alexander Klemm & Anna Ivanova, 2005. "The Russian Flat Tax Reform," IMF Working Papers 05/16, International Monetary Fund.
  6. Paulus, Alari & Peichl, Andreas, 2008. "Effects of flat tax reforms in Western Europe on equity and efficiency," EUROMOD Working Papers EM2/08, EUROMOD at the Institute for Social and Economic Research.
  7. Aaberge, R. & Colombino, U. & Strom, S. & Wennemo, T., 1998. "Evaluating alternative tax reforms in Italy with a model of joint labor supply of married couples," Structural Change and Economic Dynamics, Elsevier, vol. 9(4), pages 415-433, December.
  8. Capéau, Bart & Decoster, André & De Swerdt, Kris & Orsini, Kristian, 2008. "Welfare effects of alternative financing of social security. Some calculations for Belgium," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/196761, Katholieke Universiteit Leuven.
  9. Adam, S. & Browne, J., 2006. "Options for a UK 'flat tax': some simple simulations," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  10. Olivier Bargain & Marco Caliendo & Peter Haan & Kristian Orsini, 2005. "'Making Work Pay' in a Rationed Labour Market: The Mini-Job Reform in Germany," Discussion Papers of DIW Berlin 536, DIW Berlin, German Institute for Economic Research.
  11. Davies, James B. & Hoy, Michael, 2002. "Flat rate taxes and inequality measurement," Journal of Public Economics, Elsevier, vol. 84(1), pages 33-46, April.
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Cited by:
  1. Randjelovic, Sasa, 2013. "Effects of income tax on personal savings: econometric evidence from Serbia," EUROMOD Working Papers EM1/13, EUROMOD at the Institute for Social and Economic Research.

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