Effects Of Flat Tax Reforms On Western Europe On Equity And EfficIency

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. The authors analyze the distributional and efficiency effects of flat tax scenarios for Western European countries. These simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labor supply incentives. However, they result in higher inequality and polarization. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. This analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.