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Distributional effects of a flat tax: An empirical analysis for the Netherlands

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  • Caminada, Koen
  • Goudswaard, Kees

Abstract

In this paper, we construct a flat rate/broad base personal income tax system and we compare the distribution of the current personal income tax (including social contributions) in the Netherlands to the distribution of the simulated flat rate tax. Using extended data (personal income panel survey), the effects are simulated of eliminating deductions in exchange for a reduction in tax rates, sufficient to keep personal income tax revenue constant at the initial level and distribution of pre-tax incomes. Our simulations indicate that: - The redistributive effect of the current rate structure of the Dutch tax system - with marginal rates of 37.5%, 50% and 60% - is substantially diminished by tax deductions. Deductions appear to be very income-elastic. - After the simulated base broadening, a proportional rate of 33.2% balances the budget (ex ante). Such a flat rate causes only relatively small changes in average tax ratios. For a clear majority of the taxpayers, effects on after-tax income lie within a range of minus/plus 5%. - Tax progressivity is mainly caused by the fixed personal exemption, which was maintained in the simulated flat rate tax. We calculated only a 7 percent lower income elasticity in a flat rate system. We conclude that the income effects of the introduction of a broad base/flat personal income tax would be relatively small and cannot be considered as prohibitive.

Suggested Citation

  • Caminada, Koen & Goudswaard, Kees, 1997. "Distributional effects of a flat tax: An empirical analysis for the Netherlands," MPRA Paper 20184, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:20184
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    References listed on IDEAS

    as
    1. Koen Caminada & Kees Goudswaard, 1996. "Progression and revenue effects of income tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 57-66, January.
    2. Pechman, Joseph A, 1990. "The Future of the Income Tax," American Economic Review, American Economic Association, vol. 80(1), pages 1-20, March.
    3. John P. Formby & W. James Smith & Paul D. Thistle, 1990. "The Average Tax Burden and the Welfare Implications of Global Tax Progressivity," Public Finance Review, , vol. 18(1), pages 3-24, January.
    4. Feld, Alan L., 1995. "Living With the Flat Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(4), pages 603-617, December.
    5. Kakwani, Nanak C, 1977. "Applications of Lorenz Curves in Economic Analysis," Econometrica, Econometric Society, vol. 45(3), pages 719-727, April.
    6. Feld, Alan L., 1995. "Living With the Flat Tax," National Tax Journal, National Tax Association, vol. 48(4), pages 603-17, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    flat tax; deductions; progressivity; distribution of the tax burden;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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