Shifting Taxes from Labor to Consumption: Efficient, but Regressive?

Nico Pestel and Eric Sommer

No 7804, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Shifting taxes from labor income to consumption is regularly suggested as a measure to induce work incentives. We investigate the effect of increases in the Value Added Tax on labor supply and the income distribution in Germany, which is compensated by a revenue-neutral reduction in income-related taxes. Based on a dual data base and a microsimulation model of labor supply behavior, we confirm a general regressive impact of such a tax shift in the short run. When accounting for labor supply adjustments, the adverse distributional impact persists for personal income tax reductions, while the overall effects on inequality and progressivity become substantially lower when payroll taxes are reduced, which is due to increased work incentives, especially for low-income households.

Keywords: labor supply; consumption taxes; microsimulation; income and payroll taxes; inequality; Germany (search for similar items in EconPapers)
JEL-codes: C63 D31 H21 H23 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-12
New Economics Papers: this item is included in nep-acc and nep-pbe
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Citations: View citations in EconPapers (8)

Published - revised version published as 'Shifting Taxes from Labor to Consumption: More Employment and more Inequality?' in: Review of Income and Wealth, 2017, 63 (3), 524-563

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Working Paper: Shifting Taxes from Labor to Consumption: Efficient, but Regressive? (2013)
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