Germany , income and payroll taxes , consumption taxes , microsimulation , inequality
Abstract:
This paper investigates the effect of shifting taxes from labor income to
consumption on labor supply and the distribution of income in Germany.
We simulate stepwise increases in the value-added tax (VAT) rate, which
are compensated by revenue-neutral reductions in income-related taxes. We
differentiate between the personal income tax (PIT) and social security contributions
(SSC). Based on a dual data base and a microsimulation model of
household labor supply behavior, we find a regressive impact of such a tax
shift in the short run. When accounting for labor supply adjustments, the
adverse distributional impact persists for PIT reductions, while the overall
effects on inequality and progressivity become lower when payroll taxes are
reduced. This is partly due to increases in aggregate labor supply, resulting
from higher work incentives.
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