Effects of flat tax reforms in Western Europe on equity and efficiency

Authors

Alari Paulus, Andreas Peichl

Publication Date

Apr 2008

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.

Publication type

EUROMOD Working Paper Series

Series Number

EM2/08

Research areas

Population changes and labour market dynamics, Tax and benefit systems

Notes

working paper

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