The GWS Discussion Paper 16/8 contributes to the public dispute about the bracket creep and the need for tax reliefs by an analysis of the effects of a permanent proportional income tax reduction on the total economy as well as on the income situation of different household types. The taxation scenario is not calculated on a microeconomic level but uses a macro-econometric approach instead, in order to give a broad overview over a wide variety of effects. By combining the macro-econometric input-output model INFORGE with the socio-economic system DEMOS containing household-specific income and consumption information we can assess how a simple fiscal measure would affect the economy, different household types, and inequality. It can be shown that a tax reduction has a positive aggregate effect throughout the economy in all years of the tax reform. Working households with high incomes profit most from simple tax cuts. Non-working households, however, are faced with comparably smaller positive deviations in income, which exacerbates the projected distance between household incomes and contributes to further increasing inequality.

The paper can be downloaded here.