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How regressive are indirect taxes? A microsimulation analysis for five European countries
Author(s) -
Decoster André,
Loughrey Jason,
O'Donoghue Cathal,
Verwerft Dirk
Publication year - 2010
Publication title -
journal of policy analysis and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.898
H-Index - 84
eISSN - 1520-6688
pISSN - 0276-8739
DOI - 10.1002/pam.20494
Subject(s) - microsimulation , economics , social security , tax revenue , incentive , neutrality , indirect tax , public economics , government revenue , government (linguistics) , revenue , consumption (sociology) , macroeconomics , econometrics , labour economics , tax reform , public finance , microeconomics , finance , philosophy , linguistics , epistemology , market economy , social science , sociology , transport engineering , engineering
Shifting the tax burden from labor to consumption is proposed in many developed countries as a way to make the tax system more incentive compatible. This article deals with the simulation of such a policy change to sharpen the distributional picture. Expenditures are imputed into the EUROMOD microsimulation program. Then social security contributions are lowered and the standard VAT rate is increased to maintain government revenue neutrality. The main conclusions are that (1) indirect taxes are regressive with respect to disposable income but proportional or progressive with respect to total expenditures, and (2) indirect taxes are in any case less progressive than other components of the tax system, making the proposed measure a regressive one. A possible solution exists in increasing the progressivity of the remaining income tax. © 2010 by the Association for Public Policy Analysis and Management.