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Is a Flat Tax Feasible in a Grown-up Welfare State?

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Author Info
Clemens Fuest () (CPE, University of Cologne and IZA)
Andreas Peichl () (CPE, University of Cologne)
Thilo Schaefer () (CPE, University of Cologne)

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Abstract

The success of the flat rate tax in Eastern Europe suggests that this concept could also be a model for the welfare states of Western Europe. The present paper uses a simulation model to analyse the effects of revenue neutral flat rate tax reforms on equity and efficiency for the case of Germany. We find that a flat rate tax with a low tax rate and a low basic allowance yields positive static welfare effects amounting to approximately 1.8 per cent of income tax revenue but increases income inequality. The increase in income inequality can be avoided by combining a higher tax rate with a higher basic allowance. But in this case the efficiency gains vanish. We conclude that, due to their limited efficiency effects and their problematic distributional impact, flat tax reforms are unlikely to spill over to the welfare states of Western Europe.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3142.

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Length: 24 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:iza:izadps:dp3142

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Related research
Keywords: flat tax reform; equity; efficiency; distribution; welfare;

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D60 - Microeconomics - - Welfare Economics - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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References listed on IDEAS
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    Other versions:
  2. Soest, A. van & Das, M., 2000. "Family labor supply and proposed tax reforms in the Netherlands," Discussion Paper 20, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Schaefer, Thilo & Peichl, Andreas, 2006. "Documentation FiFoSiM : integrated tax benefit microsimulation and CGE model," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 06-10, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
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    Other versions:
  6. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier. [Downloadable!] (restricted)
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  14. repec:fth:bfdipa:5/2000 is not listed on IDEAS
  15. Peichl, Andreas & Fuest, Clemens & Schaefer, Thilo, 2005. "Dokumentation FiFoSiM: Integriertes Steuer-Transfer-Mikrosimulations- und CGE-Modell," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 05-3, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
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  19. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier. [Downloadable!] (restricted)
    Other versions:
  20. Heer, Burkhard & Trede, Mark, 2003. "Efficiency and distribution effects of a revenue-neutral income tax reform," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 87-107, March. [Downloadable!] (restricted)
  21. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2003. "The Marginal Cost of Public Funds in OECD Countries. Hours of Work Versus Labor Force Participation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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