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Flat Income Taxation, Redistribution and Labour Market Performance

[journal article]

Mooij, Ruud de
Jacobs, Bas
Folmer, Kees

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 Netherlan... view more

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.... view less

Classification
National Economy
Economic Policy

Document language
English

Publication Year
2009

Page/Pages
p. 3209-3220

Journal
Applied Economics, 42 (2009) 25

DOI
https://doi.org/10.1080/00036840802112356

ISSN
1466-4283

Status
Postprint; peer reviewed

Licence
PEER Licence Agreement (applicable only to documents from PEER project)


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© 2007 - 2025 Social Science Open Access Repository (SSOAR).
Based on DSpace, Copyright (c) 2002-2022, DuraSpace. All rights reserved.