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Working Paper 07-17 - Tax Expenditure and the Cost of Labour Taxation - An application to company car taxation

Author

Listed:
  • Benoît Laine
  • Alex Van Steenbergen

Abstract

The goal of this paper is to estimate the efficiency cost of one additional euro of revenue through the personal income tax system, considering its simultaneous effects on the labour market and the transport market. More precisely, we seek to derive estimates of the Marginal Excess Burden of marginal personal income tax rates in Belgium considering the subsidization of company cars. We find that taking into account of welfare losses in the transport market adds 5-7 cents to the welfare cost of an additional euro of tax revenue, compared to models that consider only the effects on the labour market. The cost of raising the top marginal tax rate rises by 28% to 58% depending on the model assumptions. As an aside, we estimate tax expenditure on the transport sector via the personal income tax system to be 1.9 billion euro. We conclude that there is scope for welfare improving by base broadening and rate cutting. The framework is applied to analyse the merits of cash-for-car proposals.

Suggested Citation

  • Benoît Laine & Alex Van Steenbergen, 2017. "Working Paper 07-17 - Tax Expenditure and the Cost of Labour Taxation - An application to company car taxation," Working Papers 201707, Federal Planning Bureau, Belgium.
    • Handle: RePEc:fpb:wpaper:201707
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    More about this item

    Keywords

    Efficiency; Optimal taxation; Externalities; Redistributive effects; Personal income tax; Transport;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

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