Datum: Januar 2006

Clemens Fuest, Thilo Schaefer, Andreas Peichl

FiFo / Januar 2006 / Diskussionsbeitrag, FiFo

The simpli…cation of the tax system is a key objective of many income tax reform proposals.
This is not only because complexity leads to high compliance costs for taxpayers. The comple-
xity of income tax systems is also seen as an obstacle to achieving a fair distribution of the tax
burden. According to a widespread view, complexity allows taxpayers with high incomes to use
tax loopholes and reduce their tax burden. The present paper investigates the distributional
impact of tax simpli…cation empirically, for the case of Germany. Our analysis is based on a
simulation model for the German tax and transfer system (FiFoSiM) using income tax and hou-
sehold survey microdata. We model tax simpli…cation as the abolition of a set of controversial
deductions from the tax base included in the German income tax system.We …nd that this form
of tax base simpli…cation leads to a more equitable income distribution and, not surprisingly,
an increase in tax revenue. If these measures are combined with a reduction of income tax rates
to preserve revenue neutrality, the distributional impact depends on the type of rate schedule
adjustment. The combination with a ‡at rate tax would imply that the reform redistributes in
favour of the very high incomes, and overall income inequality increases. The combination with
a less radical rate schedule adjustment, which preserves the directly progressive rate schedule,
yields a tax reform which reduces the inequality of after tax incomes.

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