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Effects of Flat Tax Reforms in Western Europe on Income Distribution and Work Incentives

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  • Paulus, Alari

    ()
    (ISER, University of Essex)

  • Peichl, Andreas

    ()
    (ZEW Mannheim)

Abstract

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and efficiency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3721.

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Length: 37 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3721

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Keywords: microsimulation; work incentives; income distribution; flat tax reform;

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References

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  1. Peichl, Andreas & Schaefer, Thilo & Scheicher, Christoph, 2006. "Measuring Richness and Poverty," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge, University of Cologne, FiFo Institute for Public Economics 06-11, University of Cologne, FiFo Institute for Public Economics.
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Cited by:
  1. Andreas Peichl, 2009. "The Benefits and Problems of Linking Micro and Macro Models: Evidence from a Flat Tax Analysis," SOEPpapers on Multidisciplinary Panel Data Research, DIW Berlin, The German Socio-Economic Panel (SOEP) 182, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. Paulus, Alari & Peichl, Andreas, 2009. "Effects of flat tax reforms in Western Europe," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(5), pages 620-636, September.

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