Implementing a Dual Income Tax in Germany:Effects on Investment and Welfare

Doina Maria Radulescu and Michael Stimmelmayr ()

No Ifo Working Papers No. 20, Ifo Working Paper Series from Ifo Institute for Economic Research at the University of Munich

Abstract: This paper investigates the effects of implementing a dual income tax (DIT) in Germany. We follow the reform proposal of the German Council of Economic Advisors(2003) and analyze its implications on capital formation, investment and welfare using a dynamic computable general equilibrium model. The main features of the model are an intertemporal investment model and the traditional Ramsey model on the household side. Our findings suggest that the introduction of a DIT with a proportional capital income tax rate of 30% and progressive labour income tax rates up to 35% leads to higher investments, an increased capital accumulation up to 5.8% and welfare gains of about 1% of GDP.

Keywords: Capital; income; taxationcomputable; general; equilibrium; modellingwelfareanalysis. (search for similar items in EconPapers)
JEL-codes: C68 D58 D92 E62 H25 (search for similar items in EconPapers)
Date: Written

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