A Tax-Benefit Model for Austria (AUTAX): Work Incentives and Distributional Effects of the 2016 Tax Reform

Abstract

This study introduces a tax-benefit model based on administrative data for Austria (AUTAX) that can be used for theex ante and ex post evaluation of reforms of personal income taxation and social benefits. We analyze the effects of the 2016 Austrian tax reform ex anteand concentrate on the effects on the distribution of net income and on work incentives. Our results show that the changes to the tax brackets have slightly increased inequality, and the middle- and high-income earners profited most. This effect has been significantly lowered by an increase in the negative income tax for low-income earners. By calculating average effective tax rates (AETRs) as well as marginal effective tax rates (METRs) along the whole income distribution in our model, we discuss changes on work incentives on the extensive but also on the intensive margin. We show that the 2016 tax reform positively affected the work incentives on the extensive and the intensive margin for higher income groups. The additional change in the negative income tax had only an impact on the extensive margin of low-income earners. These low-income earners are usually part-time workers, therefore giving a higher incentive to work part-time but no additional incentive to increase working hours. We show that a decrease in social security contributions instead of an increase in the negative income tax for low-income earners would lead to an increase in both the extensive and the intensive margin.