Distributional Effects of a Flat Tax, An Empirical Analysis for the Netherlands

Research Memorandum Department of Economics Leiden University 1997.04

34 Pages Posted: 22 Jul 2009

See all articles by Koen Caminada

Koen Caminada

Leiden Law School - Department of Economics

Kees Goudswaard

Leiden Law School - Department of Economics

Date Written: 1997

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 flate 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 iniitial level and distribution of pre-tax incomes. Our simulations indicate that: - The redistributive effect of the current rate structure of the Dutch tax system – whith 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 taxpayers, effect on after-tax income lie within a range of minus/plus 5%. - Tax progressivity is mainly caused by the fixed personale exemption, which was maintained in the simulated flat rate tax. We calculated only a 7 percent lower income elasticity ia 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.

Keywords: flat tax, deductions, progressivity, distribution of the tax burden

JEL Classification: H22, H24

Suggested Citation

Caminada, Koen and Goudswaard, Kees, Distributional Effects of a Flat Tax, An Empirical Analysis for the Netherlands (1997). Research Memorandum Department of Economics Leiden University 1997.04, Available at SSRN: https://ssrn.com/abstract=1436423 or http://dx.doi.org/10.2139/ssrn.1436423

Koen Caminada (Contact Author)

Leiden Law School - Department of Economics ( email )

P.O. Box 9520
2300 RA Leiden, NL-2300RA
Netherlands
++31715277858 (Phone)

HOME PAGE: http://www.law.leiden.edu/organisation/taxlawandeconomics/economics/staff/caminada.html

Kees Goudswaard

Leiden Law School - Department of Economics ( email )

P.O. Box 9520
2300 RA Leiden, NL-2300RA
Netherlands

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