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Shifting Taxes from Labor to Consumption: Efficient, but Regressive?

Listed author(s):
  • Nico Pestel
  • Eric Sommer

Shifting taxes from labor income to consumption is regularly suggested as a measure to induce work incentives. We investigate the effect of increases in the Value Added Tax on labor supply and the income distribution in Germany, which is compensated by a revenue-neutral reduction in income-related taxes. Based on a dual data base and a microsimulation model of labor supply behavior, we confirm a general regressive impact of such a tax shift in the short run. When accounting for labor supply adjustments, the adverse distributional impact persists for personal income tax reductions, while the overall effects on inequality and progressivity become substantially lower when payroll taxes are reduced, which is due to increased work incentives, especially for low-income households.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.436144.de/diw_sp0624.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 624.

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Length: 35 p.
Date of creation: 2013
Handle: RePEc:diw:diwsop:diw_sp624
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