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Flat income taxation, redistribution and labour market performance

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  • Bas Jacobs
  • Ruud de Mooij
  • Kees Folmer

Abstract

A flat tax rate on labour income has gained popularity in European countries. This article assesses the attractiveness of such a flat tax in achieving redistributive objectives with the smallest distortions to employment. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. Only flat tax reforms that reduce redistribution will raise employment. This finding bolsters the notions from optimal tax literature regarding the equity-efficiency trade off and the superiority of nonlinear taxes to obtain redistributive goals in an efficient way.

Suggested Citation

  • Bas Jacobs & Ruud de Mooij & Kees Folmer, 2010. "Flat income taxation, redistribution and labour market performance," Applied Economics, Taylor & Francis Journals, vol. 42(25), pages 3209-3220.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:25:p:3209-3220
    DOI: 10.1080/00036840802112356
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    References listed on IDEAS

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    1. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    2. Casper van Ewijk & Paul Tang, 2001. "Efficient Progressive Taxes and Education Subsidies," Tinbergen Institute Discussion Papers 01-002/2, Tinbergen Institute.
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    Cited by:

    1. Keshab Bhattarai, 2016. "Growth and Income Distributions in Four EU Economies," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(3), pages 263-277, August.
    2. Vanesa Jorda & Jose M. Alonso, 2020. "What works to mitigate and reduce relative (and absolute) inequality?: A systematic review," WIDER Working Paper Series wp-2020-152, World Institute for Development Economic Research (UNU-WIDER).

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