The effect of a flat income tax system on labour supply and income distribution in Malta

Abstract

The objective of this research is to analyse the impact of a 15 per cent flat income tax reform on labour supply in Malta, covering the period of 2009 and 2017. The analysis estimates the labour supply function and the wage elasticities for men and women being either single or married. Furthermore, the study examines the effect that a flat tax has on the income distribution and income inequality when compared to the progressive tax system of Malta. The income effect brought about by a change in the tax system is found to be greater than the substitution effect among individuals. Moreover, under the flat tax system, when compared to the elasticities under the progressive tax system, the sensitivity to changes in wages declined for married women; however, the reform is found to increase income inequality.