Using a taxpayer panel in order to estimate the effects of a dual income tax

Income taxation induces households to adjust their behaviour. Especially in Germany income tax law offers a variety of possibilities for tax payers to reduce their taxable base in order to avoid taxation. This behavioural adjustment affects overall tax revenue as well as individual tax burden.

In this project we are going to analyse the degree of behavioural response in Germany by measuring the elasticity of taxable income with respect to the net-of-tax rate (one minus marginal tax rate). For this purpose we use micro data provided by the Federal Statistical Office Germany which are linked to a tax payer panel for the period 2001-2004. The aim is to have more reliable estimates about the effective changes in tax revenue after tax reforms. A reform which took place in Germany during the aforementioned period serves as a natural experiment to determine the changes in individual behaviour caused by changes in the legal framework.

Furthermore the results will be integrated into a microsimulation model in order to analyse the effects of introducing a dual income tax in Germany as it has been suggested by the German Council of Economic Expert