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Labor Tax Harmonization in a Multi-Country Model

Author

Listed:
  • Matus Senaj

    () (National Bank of Slovakia)

  • Milan Vyskrabka

    () (National Bank of Slovakia)

Abstract

Labor tax rates are considerably heterogeneous across European countries. In this paper, we investigate the effects of a hypothetical policy experiment in which the tax rates levied on labor are harmonized 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. The short-run adjustment process is rather complicated: 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 labor tax system may be better prepared to face common area-wide shocks. On the other hand, shocks originating outside the euro area may increase volatility in the euro area.

Suggested Citation

  • Matus Senaj & Milan Vyskrabka, 2015. "Labor Tax Harmonization in a Multi-Country Model," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(3), pages 192-210, May.
  • Handle: RePEc:fau:fauart:v:65:y:2015:i:3:p:192-210
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    File URL: http://journal.fsv.cuni.cz/storage/1323_192-210---senaj.pdf
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    References listed on IDEAS

    as
    1. Gomes, S. & Jacquinot, P. & Pisani, M., 2012. "The EAGLE. A model for policy analysis of macroeconomic interdependence in the euro area," Economic Modelling, Elsevier, vol. 29(5), pages 1686-1714.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
    4. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.
    5. repec:cii:cepiei:2012-q4-132-5 is not listed on IDEAS
    6. Benjamin Carton, 2012. "Tax Reform and Coordination in a Currency Union," International Economics, CEPII research center, issue 132, pages 141-158.
    7. IWATA Yasuharu, 2009. "Fiscal Policy in an Estimated DSGE Model of the Japanese Economy: Do Non-Ricardian Households Explain All?," ESRI Discussion paper series 216, Economic and Social Research Institute (ESRI).
    8. Matus Senaj & Milan Vyskrabka & Juraj Zeman, 2010. "MUSE: Monetary Union and Slovak Economy model," Working and Discussion Papers WP 1/2010, Research Department, National Bank of Slovakia.
    9. Juraj Zeman & Matus Senaj, 2009. "DSGE Model-Slovakia," Working and Discussion Papers WP 3/2009, Research Department, National Bank of Slovakia.
    10. Matus Senaj & Milan Vyskrabka, 2011. "European Taxes in a Laboratory," Working and Discussion Papers WP 2/2011, Research Department, National Bank of Slovakia.
    11. Ambriško, Róbert & Babecký, Jan & Ryšánek, Jakub & Valenta, Vilém, 2015. "Assessing the impact of fiscal measures on the Czech economy," Economic Modelling, Elsevier, vol. 44(C), pages 350-357.
    12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    More about this item

    Keywords

    tax reform; DSGE model; euro area;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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