Abstract
The level of income inequality in a country is usually a contentious and politically divisive issue. How the tax structure affects this inequality is of crucial concern to policymakers. In this paper, we examine the income tax experiences of five European Union countries: Belgium, Bulgaria, Germany, Lithuania, and Poland. This paper focuses on the comparison between flat and graduated personal income tax rate structures. Various methods were used to measure the progressivity of income taxes across these countries such as the average tax rate, cumulative shares of income, and the Gini and other indices. The findings show that the graduated rate income tax structure of Germany and Belgium are the most effective at reducing inequality. On the other hand, Lithuania’s proportional income tax structure is much more effective at reducing income inequality when compared to the graduated rate structure of Poland. Also, an appropriately-sized income tax threshold can transform a flat structure to a redistributive one that compares favorably with some graduated rate structures. In the case of Bulgaria, introducing an income tax threshold that is roughly the size of average income would reduce inequality by about 4 %.
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Notes
These progressivity measures, referred to in the literature as effective progression, were different from structural progression which is measured using average and marginal tax rates.
This concept of cumulative shares was what was used to derive the Lorenz curve.
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The author wishes to thank participants at the 82nd International Atlantic Economic Conference for comments and suggestions. The paper benefited from the comments of the anonymous referees. All errors are my own.
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Stephenson, A.V. The Impact of Personal Income Tax Structure on Income Inequality for Belgium, Bulgaria, Germany, Lithuania, and Poland: A Comparison of Flat and Graduated Income Tax Structures. Atl Econ J 46, 405–417 (2018). https://doi.org/10.1007/s11293-018-9601-y
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DOI: https://doi.org/10.1007/s11293-018-9601-y