A higher VAT rate on foodstuffs may lead to more income inequality when people with lower incomes spend relatively more on foodstuffs than higher incomes. However, income inequality need not increase if the decline in purchasing power of the lower incomes is offset by lowering wage taxes for the lowest incomes. In a good tax system, the socio-economic objectives are therefore achieved by always seeing individual taxes in conjunction with each other. The bracket calculator is there for the best choice.
An analysis of individual taxes
Tax revenues by type
In most countries, government revenues are made up of a few tax types: income tax, consumption tax (VAT and excise), wealth tax and corporate tax. The literature shows that these taxes differ in the degree to which they reduce economic growth.
Payroll tax: lowering taxes on labor is good for economic growth and employment
Burdens on labor economically disruptive
In most countries, income tax is the main source of income for the government. Income tax usually consists of taxes on labor and benefit income and national insurance contributions paid by employees and employers. These taxes and contributions lead to a tax wedge: the difference between what an employer pays in labor costs and what an employee is left net. Most countries within the OECD have a relatively high wedge. You can also ask what is my tax bracket and get the information there.
The economic literature shows that there is a high tax wedge disruptive. Labor participation in particular appears to be very sensitive to the level of income tax. The effect of a lower net wage due to higher income tax on individuals’ decision whether to work or not is twofold: on the one hand, it leads to more labor participation because people have to work more to achieve a certain net income on the other hand, it makes work less rewarding which can reduce labor force participation. The literature shows that the latter effect is generally stronger than the former: higher taxes lead to a lower labor participation. Especially for women, the number of hours worked strongly depends on the level of income tax. In addition, higher labor costs arise for employers if higher taxes are not fully passed on in the negotiated wages of employees. As a result, the demand for labor and thus employment is falling.
Various options for lowering income tax
If the government decides to lower the tax rates, this can be done in two ways: by reducing the employee’s share of the wedge (mainly consisting of wage tax) or by reducing the employer’s share (mainly consisting of social contributions). According to classical economic theory, in the long term it should not matter which of the two is reduced: higher employer costs will eventually be passed on in the contractual wages of employees in an efficient labor market.