Taxation and income distribution: analysis of income tax and value added tax

Tax policy has always played a major role in political discussions in Germany, in these days as well as during the last decades. It is not surprising that even a few years after the implementation of the last steps of the German 2000 Tax Reform, tax reforms stand once again on the agendas of nearly all political parties. This study deals with the two largest sources of tax revenue for the federal government in Germany: the income tax and the value added tax. Concerning the income tax, the aim of this study is to capture the income tax system in total, including tax liabilities and tax deductions. While it is widely accepted that the income tax schedule in Germany is progressive, the distributional effects of tax deductions are usually not taken into account. It can be shown that it would be completely misleading to only consider tax liabilities as an indicator of progression for the income tax system in total. This study examines the distributional effects of both - tax liabilities and tax deductions - on different kinds of income definitions and for different kinds of households along the income scale. The value added tax is often subject to criticism from scientists and policy makers. The fundamental points of criticism are based on tax losses on the one hand and on efficiency aspects generated by two different tax rates on the other hand. This study examines the distributional impacts of a value added tax reform focussing on the (partly) abolishment of the reduced tax rate. Therefore, the additional costs for households in different regions of the income distribution are evaluated.