Inequality neutral flat tax reforms in Europe: differences between East and West

Alari Paulus, Andreas Peichl
2009 unpublished
The flat tax idea is becoming increasingly popular, especially in transition countries in Eastern Europe. The introduction of a flat tax is supposed to have several advantages. However, flat taxes can have a serious drawback in terms of their impact on the distribution of tax burdens. The aim of this paper is to analyse the effects of flat tax reforms that do not change the inequality of the income distribution. We undertake a systematic approach for choosing flat tax parameters for a
more » ... e analysis of different flat tax designs for selected Western European countries. Our analysis yields the following results. The revenue and inequality neutral flat tax rates tend to be higher in Continental than in Southern European countries, while being little affected by different measures of income inequality. The high marginal rates imply that revenue and inequality neutral flat reforms are not feasible in most countries, however, there might be scope for non-revenue or non-inequality neutral reforms depending on political preferences. JEL Codes: C81, D31, H24