European Taxes in a Laboratory
AbstractLabour tax rates are considerably heterogeneous across European countries. In this paper, we investigate the effects of a policy experiment in which the tax rates levied on labour are harmonised in the member countries of the euro area. Using a four-country DSGE model, we find that shifts in domestic tax rates are the main driver of the total outcome of the policy change while spillover effects are rather limited in the long run. Countries that decrease their total tax wedge boost their economies while countries that increase their tax wedge lose a proportion of output. The adjustment process is rather complicated: a country which gains in the long run may temporarily go through a period of dampened economic activity. The adjustment process is complicated somewhat by the fact that a country which gains in the long run may temporarily go through a period of dampened economic activity. In terms of volatility, the euro area with its homogenous labour tax system may be better prepared to face common area-wide shocks. On the other hand, shocks originating outside the euro area may increase the volatility of euro area output under the homogenous tax regime.
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Bibliographic InfoPaper provided by Research Department, National Bank of Slovakia in its series Working and Discussion Papers with number WP 2/2011.
Length: 49 pages
Date of creation: Dec 2011
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More information through EDIRC
tax reform; DSGE model; euro area;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-DGE-2012-03-21 (Dynamic General Equilibrium)
- NEP-PUB-2012-03-21 (Public Finance)
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