Feasible smooth income tax schedules: benefits and distributional implications

Authors

Publication Date

Jul 2019

Summary

Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper, we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks associated with defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze the possible implications of a hypothetical switch to smoother income tax tariffs. It turns that smooth tax functions are convenient to eliminate bracket creep, while aggregate income inequality is uniformly reduced to a small extent.

DOI

https://doi.org/10.1080/00036846.2019.1638500

Publication type

Journal Article

Research area

Tax and benefit systems

Notes

Online Early

Related Publications

Smooth income tax schedules: derivation and consequences
Diana Estévez Schwarz, Eric Sommer, EUROMOD Working Paper Series -21 May 2018

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