Fundamental capital income tax reforms

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The current German tax system is complex, opaque, and inconsistent with theoretical taxation models. High tax rates, exacerbated by international competition, deter economic activity, necessitating a fundamental reform. Michael Stimmelmayr examines the efficiency gains from capital income tax reforms, a challenging endeavor due to the multiple repercussions of altering several tax rates simultaneously. Such changes prompt firms and households to adjust their behavior, complicating the analysis. A dynamic computable general equilibrium (CGE) model is essential for accurately quantifying both short- and long-term effects of these reforms. Simulation results indicate that the 2000 German Tax Reform could boost GDP by approximately 6% in the long run, though it incurs significant short-term costs as growth benefits materialize later. Additionally, enhanced economic activity could increase the wealth of German households by nearly 1% in the long run. The analysis also explores the implications of introducing a flat tax of 25%, known as "Kirchhof's Einfachsteuer," and a consumption-based tax system, providing a comprehensive view of potential reforms.