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Smooth Income Tax Schedules: Derivation and Consequences

Diana Estévez Schwarz () and Eric Sommer
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Diana Estévez Schwarz: Beuth University of Applied Sciences

No 11493, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks of defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze possible implications from a hypothetical switch to smoother income tax tariffs. We find that smooth tax functions eliminate the most extreme cases of bracket creep, while the impact on income inequality is mostly negligible, but uniformly reducing.

Keywords: personal income taxation; income distribution; nonlinear smooth tax tariff; microsimulation (search for similar items in EconPapers)
JEL-codes: H24 C63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2018-04
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Working Paper: Smooth income tax schedules: derivation and consequences (2018) Downloads
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