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Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria’s 2008 flat tax reform

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  • Aleksandar Vasilev
Abstract
This paper provides a quantitative evaluation of the welfare effect of the introduction of proportional taxation in Bulgaria in 2008, an effect that operates through the grey economy channel. Using a general-equilibrium model, augmented with informal sector, a computational experiment is performed to evaluate the welfare gain from the adoption of proportional taxation. The lower effective tax burden in the new tax regime produces a relocation of people into the official sector, stimulates investment, and increases output and consumption. Finally, under the flat tax regime, the size of the informal sector is smaller, and quantitatively consistent with OECD (Is informal normal? Towards more and better jobs in developing countries. OECD, Paris, 2009 ) and European Commission (Tax reforms in EU member states, Official Publications of the European Communities, Luxembourg, p 2012, 2012 ) figures. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Aleksandar Vasilev, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria’s 2008 flat tax reform," Economic Change and Restructuring, Springer, vol. 48(2), pages 169-185, May.
    • Handle: RePEc:kap:ecopln:v:48:y:2015:i:2:p:169-185
    DOI: 10.1007/s10644-015-9159-5
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    More about this item

    Keywords

    Taxation; Exogenous growth; Informal sector; Labor reallocation; Welfare gains; H22; J46; D51; D91; O41;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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