CESifo Economic Studies Advance Access originally published online on February 20, 2008
CESifo Economic Studies 2008 54(1):73-97; doi:10.1093/cesifo/ifn003
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Does a Simpler Income Tax Yield More Equity and Efficiency?
*Center for Public Economics, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany, e-mails: clemens.fuest{at}uni-koeln.de; a.peichl{at}uni-koeln.de; schaefer{at}fifo-koeln.de, respectively.
Center for Public Economics, University of Cologne, Zuelpicher Str. 182, 50937 Cologne, Germany.
This article 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 income tax base. 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 this is 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 increases income inequality at the expense of the middle class, but it also leads to efficiency gains because tax distortions of labour supply are reduced. The combination with a rate schedule adjustment, which preserves the directly progressive schedule reduces inequality but increases overall tax distortions. We conclude that the effects of tax base simplification on after tax income inequality and tax distortions mainly depend on the type of tax schedule adjustment. (JEL Codes: D3, H2, J22)
Key Words: Flat tax • income tax reform • tax simplification
The authors would like to thank two anonymous referees, Christian Bergs, Frank Brenneisen, René Frey, Guyonne Kalb, Panayiota Lyssiotou and Axel Schmidt for their helpful contributions. The usual disclaimer applies.