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Flat Income Taxation, Redistribution and Labour Market Performance

[journal article]

Mooij, Ruud de; Jacobs, Bas; Folmer, Kees

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Abstract A flat tax rate on labour income has gained popularity in European countries. This paper 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 non-linear taxes to obtain redistributive goals in an efficient way.
Classification National Economy; Economic Policy
Document language English
Publication Year 2009
Page/Pages p. 3209-3220
Journal Applied Economics, 42 (2009) 25
ISSN 1466-4283
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)