Effects of flat tax reforms in Western Europe on equity and efficiency, EMWP2/08

The at income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and e¢ ciency e¤ects of at tax scenarios for Western European countries. Our simulations show that at 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 at taxes to increase both equity and e¢ ciency. Our analysis suggests that Mediterranean countries are more likely to bene t from at taxes. JEL Codes: C81, D31, H24 Keywords: Flat tax reform, income distribution, work incentives, microsimulation This paper uses EUROMOD version C13. EUROMOD is continually being improved and updated and the results presented here represent the best available at the time of writing. Any remaining errors, results produced, interpretations or views presented are the authorsresponsibility. EUROMOD relies on micro-data from twelve di¤erent sources for fteen countries. This paper uses data from the European Community Household Panel (ECHP) User Data Base made available by Eurostat; the Austrian version of the EU-SILC made available by Statistik Austria; the Panel Survey on Belgian Households (PSBH) made available by the University of Liège and the University of Antwerp; the Income Distribution Survey made available by Statistics Finland; the public use version of the German Socio Economic Panel Study (GSOEP) made available by the German Institute for Economic Research (DIW), Berlin; the Greek Household Budget Survey by the National Statistical Service of Greece; the Socio-Economic Panel for Luxembourg (PSELL-2) made available by CEPS/INSTEAD; the Socio-Economic Panel Survey (SEP) made available by Statistics Netherlands through the mediation of the Netherlands Organisation for Scienti c Research Scienti c Statistical Agency, and the Family Expenditure Survey (FES), made available by the UK O¢ ce for National Statistics (ONS) through the Data Archive. Material from the FES is Crown Copyright and is used by permission. Neither the ONS nor the Data Archive bears any responsibility for the analysis or interpretation of the data reported here. An equivalent disclaimer applies for all other data sources and their respective providers. This paper is based on work carried out during a visit to the European Centre for Analysis in the Social Sciences (ECASS) at the Institute for Social and Economic Research (ISER), University of Essex, supported by the Access to Research Infrastructures action under the EU Improving Human Potential Programme. Andreas Peichl is grateful for nancial support by the Fritz Thyssen foundation. We would like to thank Clemens Fuest and Stephen Pudney and participants of ECINEQ, I-CUE and IMA conferences and seminars in Cologne, Essex and Mannheim and an anonymous referee for helpful comments and suggestions. We are indebted to all past and current members of the EUROMOD consortium for the construction and development of EUROMOD. However, any errors and the views expressed in this paper are the authorsresponsibility. In particular, the paper does not represent the views of the institutions to which the authors are a¢ liated.