The Income Tax Reform in Slovenia: Should the Flat Tax Have Prevailed?

In 2007 Slovenia launched a comprehensive reform of its tax system. This article presents an analysis of several envisaged tax reform scenarios, including the flat tax proposal, with a dynamic general equilibrium model of the Slovenian economy, linked to a microsimulation model. We focus mainly on the macroeconomic and welfare aspects of the proposed scenarios, thus capturing the overall effect on individual taxpayers and the government budget. The main characteristics of the model are presented along with the results of different reform scenarios, including the one that finally passed the parliament and now forms part of Slovenia’s tax system. Our results suggest that options other than the flat tax system are better suited to the country’s long-term economic development.