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The Impact of the Flat Tax Reform on Inequality - the case of Romania

Liviu Voinea and Flaviu Mihaescu
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Liviu Voinea: Academy of Economic Studies, Bucharest and Executive Director, Group of Applied Economics
Flaviu Mihaescu: Associate Researcher, Group of Applied Economics

Journal for Economic Forecasting, 2009, issue 4, 19-41

Abstract: In this paper we focused on the flat tax impact on inequality in Romania. We compared 2005 against 2004, when we were able to isolate the flat tax impact from other factors. We found that the higher the gross wage is, the higher the flat tax gains are. The inequality indicators we calculated (the Gini index, the relative mean deviation, the coeficient of variation, the standard deviation of logarithms, the Mehran index and the Piesch index) show an increase in inequality determined by the flat tax. The Lorenz curve is illustrative, as only the last quantile of the population (richest 20%) appears as the clear winner of the flat tax. The results also indicate that the higher the income level, the higher the income elasticity of consumption. We conclude that the flat tax led to increased income inequality and it stimulated households consumption particularly among the wealthiest households.

Keywords: flat tax; inequality; income distribution; consumption elasticity (search for similar items in EconPapers)
JEL-codes: H24 H31 I39 E62 E21 J31 (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:rjr:romjef:v::y:2009:i:4:p:19-41