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Does tax simplification yield more equity and efficiency? An empirical analysis for Germany

  • Peichl, Andreas
  • Fuest, Clemens
  • Schaefer, Thilo

This paper investigates the impact of tax simplification on various indicators of the efficiency of the tax system and on the distribution of income. The analysis is based on a simulation model (FiFoSiM) using German income tax and household survey microdata. We model tax simplification as the abolition of a set of deductions from the tax base included in the German income tax system. We find that this form of tax base simplification leads to a reduction in the use of professional tax advice, a more equitable income distribution and an increase in tax revenue. If these measures are combined with a reduction of income tax rates to preserve revenue neutrality, the effects depend on the type of rate schedule adjustment. The combination with a flat rate tax implies redistribution in favour of very high incomes, and an overall increase in income inequality. Efficiency effects in terms of changes in marginal tax rates and labor supply effects are mixed. The combination with a rate schedule adjustment which preserves the directly progressive rate schedule yields a tax reform which reduces the inequality of after tax incomes. We conclude that tax simplification may improve the efficiency of the tax system without increasing inequality of after tax income.

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Paper provided by University of Cologne, FiFo Institute for Public Economics in its series FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge with number 06-5.

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Date of creation: 2006
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Handle: RePEc:zbw:uoccpe:5147
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  1. Peichl, Andreas & Fuest, Clemens & Schaefer, Thilo, 2006. "Führt Steuervereinfachung zu einer "gerechteren" Einkommensverteilung? Eine empirische Analyse für Deutschland," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 06-1, University of Cologne, FiFo Institute for Public Economics.
  2. Esteban, Joan & Ray, Debraj, 1994. "On the Measurement of Polarization," Econometrica, Econometric Society, vol. 62(4), pages 819-51, July.
  3. Joel Slemrod, 1992. "Did the Tax Reform Act of 1986 Simplify Tax Matters?," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 45-57, Winter.
  4. Gerhard Wagenhals, 2001. "Incentive and Redistribution Effects of the "Karlsruher Entwurf zur Reform des Einkommenssteuergesetzes"," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 194/2001, Department of Economics, University of Hohenheim, Germany.
  5. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
  6. Gerhard Wagenhals, 2004. "Tax-benefit microsimulation models for Germany: A Survey," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 235/2004, Department of Economics, University of Hohenheim, Germany.
  7. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
  8. Franz W. Wagner, 2006. "Was bedeutet Steuervereinfachung wirklich?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(1), pages 19-33, 02.
  9. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  10. Peichl, Andreas, 2005. "Die Evaluation von Steuerreformen durch Simulationsmodelle," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 05-1, University of Cologne, FiFo Institute for Public Economics.
  11. Peichl, Andreas & Fuest, Clemens & Schaefer, Thilo, 2005. "Dokumentation FiFoSiM: Integriertes Steuer-Transfer-Mikrosimulations- und CGE-Modell," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 05-3, University of Cologne, FiFo Institute for Public Economics.
  12. Wolfson, Michael C, 1994. "When Inequalities Diverge," American Economic Review, American Economic Association, vol. 84(2), pages 353-58, May.
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