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The long-term economic impact of the flat tax in Poland. CGE simulation under alternative assumptions

  • Jakub Boratyński

    ()

    (University of Lodz, Faculty of Economics and Sociology, Department of Theory and Analyses of Economic Systems)

  • Jakub Borowski

    ()

    (Warsaw School of Economics, Collegium of World Economy, Department of Economics II)

The purpose of this paper is to assess the long-term macroeconomic effects of introducing the flat personal income tax at the level of 18% in Poland. We perform the simulation on a static CGE (computable general equilibrium) model which helps track the reaction of the economy on the impulse arising from the change in the tax regime. We assume that the gap in government revenues arising from the flat tax introduction will be fully matched by cuts in government consumption. The literature suggests that the flat tax reform is likely to stimulate labor supply and capital expansion. The actual macroeconomic outcome largely depends on adjustment mechanisms at work – especially the driving force of investment. If the increased household savings were to be fully transformed into investment, GDP gain of 0.7−0.9% is observed, otherwise this effect is dampened to 0–0.2%. The tax regime change in the analyzed form will deepen inequality and is likely to reduce welfare of some (particularly low-income) households.

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Article provided by National Bank of Poland, Economic Institute in its journal Bank i Kredyt.

Volume (Year): 43 (2012)
Issue (Month): 3 ()
Pages: 5-30

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Handle: RePEc:nbp:nbpbik:v:43:y:2012:i:3:p:5-30
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  9. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2012. "Optimal top marginal tax rates under income splitting for couples," European Economic Review, Elsevier, vol. 56(6), pages 1055-1069.
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