Feasible smooth income tax schedules: benefits and distributional implications

Publication type:

Journal Article

Authors

D. Estévez Schwarz and E. Sommer

Publication date

8 Jul 2019

Summary

Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper, we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks associated with defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze the possible implications of a hypothetical switch to smoother income tax tariffs. It turns that smooth tax functions are convenient to eliminate bracket creep, while aggregate income inequality is uniformly reduced to a small extent.

Published in

Applied Economics

DOI

https://doi.org/10.1080/00036846.2019.1638500

Subjects

Income Dynamics, Microsimulation and Taxation