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Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

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  • Leon Bettendorf
  • Albert van der Horst
  • Ruud A. de Mooij

Abstract

Abstract This paper analyses the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rises in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and with small labour market imperfections. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value-added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers. Copyright 2009 The Authors.

Suggested Citation

  • Leon Bettendorf & Albert van der Horst & Ruud A. de Mooij, 2009. "Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis," The World Economy, Wiley Blackwell, vol. 32(9), pages 1319-1347, September.
    • Handle: RePEc:bla:worlde:v:32:y:2009:i:9:p:1319-1347
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    References listed on IDEAS

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    1. Albert van der Horst & Leon Bettendorf & Hugo Rojas-Romagosa, 2007. "Will Corporate Tax Consolidation improve Efficiency in the EU ?," Tinbergen Institute Discussion Papers 07-076/2, Tinbergen Institute.
    2. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, January.
    3. Stephen Nickell & Luca Nunziata & Wolfgang Ochel, 2005. "Unemployment in the OECD Since the 1960s. What Do We Know?," Economic Journal, Royal Economic Society, vol. 115(500), pages 1-27, January.
    4. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document 125, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Timo Tyrväinen, 1995. "Real Wage Resistance and Unemployment: Multivariate Analysis of Cointegrating Relations in 10 OECD Countries," OECD Jobs Study Working Papers 10, OECD Publishing.
    6. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, April.
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    8. Michael Devereux, 2004. "Debating Proposed Reforms of the Taxation of Corporate Income in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 71-89, January.
    9. Michiel Evers & Ruud de Mooij & Daniël van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
    11. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
    12. Albert van der Horst, 2003. "Structural estimates of equilibrium unemployment in six OECD economies," CPB Discussion Paper 19, CPB Netherlands Bureau for Economic Policy Analysis.
    13. Ruud Mooij, 2005. "Will Corporate Income Taxation Survive?," De Economist, Springer, vol. 153(3), pages 277-301, September.
    14. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
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    Citations

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    Cited by:

    1. Horst Feldmann, 2011. "The Unemployment Puzzle of Corporate Taxation," Public Finance Review, , vol. 39(6), pages 743-769, November.
    2. Alvarez Martinez, Maria Teresa & Barrios, Salvador & Bettendorf, Leon & d'Andria, Diego & Gesualdo, Maria & Loretz, Simon & Pontikakis, Dimitrios & Pycroft, Jonathan, 2016. "A New Calibration for CORTAX: A computable general equilibrium model for simulating corporate tax reforms," JRC Working Papers on Taxation & Structural Reforms 2016-09, Joint Research Centre (Seville site).
    3. Eduardo Lora & Johanna Fajardo-González, 2016. "Employment and taxes in Latin America: An empirical study of the effects of payroll, corporate income and value-added taxes on labor outcomes," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, vol. 35(Especial ), pages 75-117, January.
    4. Leon Bettendorf & Albert Van Der Horst & Ruud A. De Mooij & Hendrik Vrijburg, 2010. "Corporate Tax Consolidation and Enhanced Cooperation in the European Union," Fiscal Studies, Institute for Fiscal Studies, vol. 31(4), pages 453-479, December.
    5. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    6. Antonio Estache & Brigitta Gersey, 2018. "Do Corporate Income Tax Rates Cuts Create Jobs? The European Experience," Working Papers ECARES 2018-01, ULB -- Universite Libre de Bruxelles.
    7. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.

    More about this item

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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