We study three budget-neutral reforms of the German tax and transfer system designed to improve work incentives for people with low incomes: a feasible flat tax reform that provides a basic income equal to the current level of the means-tested unemployment benefit, and two alternative
reforms that involve employment subsidies to stimulate participation and full-time work, respectively. We estimate labor supply reactions and welfare effects using a microsimulation model based on household data from the Socio-Economic Panel and a structural labor supply model. We find that
all three reforms increase labor supply in the first decile of the income distribution. The flat tax scenario reduces overall labor supply by about 5%; the reform designed to increase participation reduces labor supply by 1%; the reform that provides incentives to work full-time has negligible
effects on overall labor supply. With equal welfare weights, aggregate welfare gains are realizable under all three reforms.
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Document Type: Research Article
Publication date: 2017-03-01
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As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.
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FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.
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