Abstract
We study the quantitative effects of two revenue-neutral income tax reform proposals, (i) a flat-rate tax and (ii) a consumption tax, in a general equilibrium model with elastic labor supply and progressive income taxation. Households are heterogeneous with regard to their productivity and their assets. The model is calibrated with regard to the German economy in 1996. Importantly, the endogenous labor income distribution as computed from our model is equal to the empirical labor income distribution in Germany. As our first main result, both reform proposals are shown to have only negligible effects on the labor income distribution. Second, both tax reform proposals result in a moderate increase of aggregate employment and a strong increase of aggregate savings. And third, both reform proposals imply significant steady-state welfare gains equivalent to a rise of total consumption of 3.6% and 8.2%, respectively.
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