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How regressive are indirect taxes? A microsimulation analysis for five European countries

Author

Listed:
  • André Decoster

    (Professor, University of Leuven, Belgium)

  • Jason Loughrey

    (Ph.D. student, Rural Economy Research Centre, Teagasc, Ireland)

  • Cathal O'Donoghue

    (Head, Rural Economy Research Centre, Teagasc, Ireland)

  • Dirk Verwerft

    (Research Assistant, University of Leuven, Belgium)

Abstract

Shifting the tax burden from labor to consumption is proposed in many developed countries as a way to make the tax system more incentive compatible. This article deals with the simulation of such a policy change to sharpen the distributional picture. Expenditures are imputed into the EUROMOD microsimulation program. Then social security contributions are lowered and the standard VAT rate is increased to maintain government revenue neutrality. The main conclusions are that (1) indirect taxes are regressive with respect to disposable income but proportional or progressive with respect to total expenditures, and (2) indirect taxes are in any case less progressive than other components of the tax system, making the proposed measure a regressive one. A possible solution exists in increasing the progressivity of the remaining income tax. © 2010 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
  • Handle: RePEc:wly:jpamgt:v:29:y:2010:i:2:p:326-350
    DOI: 10.1002/pam.20494
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    File URL: http://hdl.handle.net/10.1002/pam.20494
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    References listed on IDEAS

    as
    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. Bruce D. Meyer & James X. Sullivan, 2003. "Measuring the Well-Being of the Poor Using Income and Consumption," NBER Working Papers 9760, National Bureau of Economic Research, Inc.
    3. Robin Boadway & Pierre Pestieau, 2002. "Indirect Taxation and Redistribution: The Scope of the Atkinson-Stiglitz Theorem," Working Papers 1005, Queen's University, Department of Economics.
    4. Bosch, L. H. M. & van den Noord, P. J., 1990. "Alternative financing of social insurance systems," Journal of Policy Modeling, Elsevier, vol. 12(1), pages 61-76.
    5. Decoster, Andre & Schokkaert, Erik & Van Camp, Guy, 1997. "Is redistribution through indirect taxes equitable?," European Economic Review, Elsevier, vol. 41(3-5), pages 599-608, April.
    6. Sutherland, Holly & Immervoll, Herwig & O'Donoghue, Cathal, 1999. "An introduction to EUROMOD," EUROMOD Working Papers EM0/99, EUROMOD at the Institute for Social and Economic Research.
    7. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September.
    8. John Sabelhaus & Jeffrey A. Groen, 2000. "Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 431-438, August.
    9. Neil Warren, 2008. "A Review of Studies on the Distributional Impact of Consumption Taxes in OECD Countries," OECD Social, Employment and Migration Working Papers 64, OECD Publishing.
    10. André Decoster, 2005. "How progressive are indirect taxes in Russia?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(4), pages 705-729, October.
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