Higher income taxes cut consumption and VAT revenue
Confidence: Medium
On by default
Shape: Proportional
When everyone's income taxes rise, consumption falls, especially among low and middle incomes, and VAT revenue is lost. The effect is smaller than for a rise on low and middle incomes alone, because high earners save more of their income.
Of every 100 euros that a change to “All earned and capital income taxes” saves or brings in, 8 € is lost as revenue on the line “Value added tax” every year. (The other way round if the change adds spending or cuts taxes.)
E(t) = s × T(t)
Derived: 15% × low and middle incomes' share of income tax about 57% ≈ 8%.
How the effect builds up over time
Share of the change's own effect on the balance, year by year while the change continues: −15% means 15% of a saving comes back as cost (or 15% of extra revenue is lost). With the default values.
You can switch the effect on or off and adjust its assumptions in the simulator under Cause-and-effect chains.