OECD Taxation Working Papers

ISSN :: 2223-5558 (online)
DOI :: 10.1787/22235558

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Working papers from the Centre for Tax Policy and Administration of the OECD that cover the full range of the Centre’s work on taxation with the main focus on tax policy related issues.

Shifting from Social Security Contributions to Consumption Taxes

The Impact on Low-Income Earner Work Incentives

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Authors:

Alastair Thomas¹, Fidel Picos-Sánchez²

Author Affiliations

1: OECD, France

2: University of Vigo, Spain

Publication Date

24 July 2012

Bibliographic information

No.:: 11

Pages

DOI

10.1787/5k95qw92l521-en

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This paper investigates the merits of increasing work incentives for low-income workers by shifting part of the tax burden from social security contributions (SSC) to consumption taxes (specifically VAT) in 13 European OECD countries. Simulation results based on household budget survey microdata show that such reforms will increase work incentives for low-income workers at both participation and hours-worked margins. However, these increases will generally be small as part of the VAT increase will still be borne by low-income workers. This, combined with difficulty targeting the reforms and potential equity concerns regarding increasing the tax burden on non-workers, suggests that alternate funding sources to a VAT increase should also be considered to fund SSC reductions.

Keywords:: consumption tax, social security contributions, VAT, work incentives

JEL Classification:

H21: Public Economics / Taxation, Subsidies, and Revenue / Efficiency; Optimal Taxation
H23: Public Economics / Taxation, Subsidies, and Revenue / Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H24: Public Economics / Taxation, Subsidies, and Revenue / Personal Income and Other Nonbusiness Taxes and Subsidies
H55: Public Economics / National Government Expenditures and Related Policies / Social Security and Public Pensions