Models and Measurement of Welfare and Inequality pp 419-432 | Cite as
Income Tax Reform in Germany: A Welfare Analysis
Abstract
The 1986–1990 income tax reform in the Federal Republic of Germany has been described by some politicians as the major tax reform in this century. Other politicians suggest that the reform merely redistributes income from the poor to the rich. To subject these claims made by politicians to serious scrutiny is an challenging task for an economist.
Therefore, we analyze the impact of the 1986–1990 income tax reform on welfare and on progressivity based on an econometrically estimated and tested model. This model is consistent with economic theory and it is based on a representative sample of households living in the Federal Republic of Germany.
Contrary to all other analyses of this tax reform our simulation exercise accounts for nonconvexities in the budget sets of the families, and — by using a flexible preference specification — it allows for backward bending labour supply curves, contrary to the popular, though usually untested, linear labour supply assumption.
Keywords
Labour Supply Lorenz Curve Social Security System Inequality Aversion Social Security ContributionPreview
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