Distributional and welfare effects of Germany’s year 2000 tax reform: the context of savings and portfolio choice

Abstract

This paper empirically investigates distributional and welfare effects of Germany’s year 2000 tax reform in the context of the household savings decision and the allocation of wealth to a portfolio of assets. The reform is simulated in an ex ante behavioural microsimulation approach. Behavioural responses resulting from changes in capital income taxation are estimated in an empirical demand model for household savings and asset allocation, which is applied to German survey data. Significant reductions in tax rates result in income gains for most of the households. Gains are found to be greater for households in higher tax brackets, whereby income inequality increases, in particular in East Germany. Moreover, households increase savings and alter the structure of asset demand as a result of shifts in relative asset prices. As a result, utility losses reduce welfare effects for almost all households, in particular for households with greater savings.