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A Belgian Flat Income Tax. Effects on Labour Supply and Income Distribution

André Decoster (), Kris De Swerdt and Kristian Orsini ()

Review of Business and Economic Literature, 2010, vol. LV, issue 1, 23-54

Abstract: The adverse distributional effects of a flat tax are well known and have been documented by empirical research in several countries, including Belgium. Advocates of the flat tax argue, correctly, that these studies do not take into account agents’ behavioural reactions and possible feed back effects. One of the important effects in this context is the potential increase in labour supply and the resulting increase in the taxable base and decrease in unemployment allowances. In this study we calculate the cost recovery of the introduction of a Belgian flat tax, based on a micro-simulation model that includes a labour supply model. We find that there is a clearly positive effect on labour supply and hence also on the tax base. By introducing a revenue-neutral flat tax, labour supply increases by approximately 47,000 full-time equivalents. Yet, compared to a static scenario, the cost recovery only allows the revenue-neutral flat tax to decrease from 38.5% to 37%. Furthermore, there is little or no impact of these employment effects on the regressive nature of a flat tax reform.

Keywords: flat tax; income distribution; microsimulation; labour supply (search for similar items in EconPapers)
JEL-codes: C81 D31 H22 H24 J22 (search for similar items in EconPapers)
Date: 2010
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Journal Article: A Belgian Flat Income Tax: Effects on Labour Supply and Income Distribution (2010)
Working Paper: A Belgian flat income tax: effects on labour supply and income distribution (2008) Downloads
Working Paper: A Belgian flat income tax: effects on labour supply and income distribution (2008) Downloads
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