There is a consensus, in both academia and economic policy circles, that the
reform of the personal income tax system in Serbia is necessary one. Two
frequently discussed reform scenarios are East European style flat tax and
the comprehensive income tax model of Western Europe. Most Central and
Eastern European (CEE) countries have recently reformed their income tax
systems by introducing some form of flat tax scheme, while in numerous
countries of Western Europe the possibility of flat tax reform is also
seriously considered. Opponents of the reform usually stress the adverse
distributional effects of flat tax schemes. The aim of our paper is to
contribute to the empirical literature on the distributional effects of
alternative tax reform scenarios. The analysis is based on the tax and
benefit micro-simulation model for Serbia (SRMOD). The results suggest that
redesigning the existing income tax system so as to introduce a uniform tax
rate and increase the basic allowance would somewhat reduce inequality and
improve vertical inequity in taxation. On the other hand, in the case of the
introduction of comprehensive income tax, considerably larger equalizing and
progressivity effects would be achieved. At the same time, since in both
cases redistribution will not affect the bottom decile group, no significant
effects (in either cases) on poverty reduction will be achieved.
Addressing inequality and poverty with tax instruments