Labor supply responses and welfare effects of tax reforms

During the late 1980s and early 1990s, taxation of wage income has undergone a change towards a proportional tax regime in many countries. Our analysis shows that gradual tax reforms in Norway may have removed some of the distortions on worker behavior. Moreover, we find that proportional taxes may reduce the inequality in the distribution of disposable household income. Yet, when the distributional consequences are related to changes in individual welfare, we find that rich households may benefit Far more than households at the other tail of the income distribution, because they earn more without any significant increase in effort.