| By: |
Fuest, Clemens;
Peichl, Andreas;
Schaefer, Thilo |
| Abstract: |
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. |
| Keywords: |
Income distribution, polarisation, tax simplification, flat tax |
| JEL: |
D3 H2 J22 |
| Date: |
2006 |
| URL: |
http://d.repec.org/n?u=RePEc:zbw:uoccpe:5147&r=pub |