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Implementing a Dual Income Tax in Germany: Effects on Investment and Welfare

Author

Listed:
  • Doina Radulescu
  • Michael Stimmelmayr
  • Doina Maria Radulescu

Abstract

This paper investigates the effects of implementing a dual income tax (DIT) in Germany. We follow the reform proposal of the German Council of Economic Advisors (2003) and analyze its implications on capital formation, investment and welfare using a dynamic computable general equilibrium model. The main features of the model are an intertemporal investment model and the traditional Ramsey model on the household side. Our findings suggest that the introduction of a DIT with a proportional capital income tax rate of 30% and progressive labour income tax rates up to 35% leads to higher investments, an increased capital accumulation up to 5.8% and welfare gains of about 1% of GDP.

Suggested Citation

  • Doina Radulescu & Michael Stimmelmayr & Doina Maria Radulescu, 2005. "Implementing a Dual Income Tax in Germany: Effects on Investment and Welfare," ifo Working Paper Series 20, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:ifowps:_20
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    References listed on IDEAS

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    Cited by:

    1. Andreas PEICHL, 2008. "The Benefits of Linking CGE and Microsimulation Models - Evidence from a Flat Tax analysis," EcoMod2008 23800106, EcoMod.
    2. Christoph Spengel & Wolfgang Wiegard, 2004. "Dual Income Tax: A Pragmatic Tax Reform Alternative for Germany," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(03), pages 15-22, October.
    3. repec:ces:ifodic:v:2:y:2004:i:3:p:14567752 is not listed on IDEAS

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    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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