Shifting from social security contributions to consumption taxes : the impact on low-income earner work incentives

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.