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Employment Effects of Income Tax Reforms: Lessons from Slovakia

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  • Michal Horváth
  • Zuzana Siebertová

Abstract

Fundamental income tax reforms are usually justified by or opposed because of large employment implications. The employment gains and losses are supposed to originate from various behavioural and dynamic effects of tax reforms over the medium to long term. To test the limits of such arguments, we study hypothetical radical measures designed to have potentially large employment effects in the context of Slovakia. A close inspection of the different implications of such tax reforms for adjustment on the extensive margin of the labour market reveals that promises or worries of large employment effects have little empirical support. This is because labour supply responses to ‘making work pay’ are small, the requirement of revenue neutrality limits the extent to which (dis)incentivising work is feasible, and because income effects arising from positive assortative mating within families counteract total individual-level effects. Our framework suggests the focus of tax reformers should be on the variation in effective labour supply coming from intensive margin effects.

Suggested Citation

  • Michal Horváth & Zuzana Siebertová, 2019. "Employment Effects of Income Tax Reforms: Lessons from Slovakia," Discussion Papers 54, Central European Labour Studies Institute (CELSI).
  • Handle: RePEc:cel:dpaper:54
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    File URL: https://celsi.sk/media/discussion_papers/DP54_VqtQadN.pdf
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    References listed on IDEAS

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    1. Olivier Bargain & Marco Caliendo & Peter Haan & Kristian Orsini, 2010. "“Making work pay” in a rationed labor market," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(1), pages 323-351, January.
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    4. Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2016. "Labour force participation elasticities and the move away from a flat tax: the case of Slovakia," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-26, December.
    5. John Creedy & Nicolas Hérault & Guyonne Kalb, 2009. "Abolishing the Tax-Free Threshold in Australia: Simulating Alternative Reforms," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 219-246, June.
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    More about this item

    Keywords

    microsimulation; dynamic general equilibrium; employment; labour supply elasticity; tax reform;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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