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Fiscal Implications of Personal Tax Adjustments in the Czech Republic

Author

Listed:
  • Alena Bicakova
  • Jiri Slacalek
  • Michal Slavik

Abstract

We investigate the fiscal implications of the changes in personal income tax implemented in the Czech Republic in January 2006. In addition to evaluating the direct effect of this tax reform, our analysis takes into account its employment effect on the government budget due to individuals entering or leaving employment. We first estimate the probability of working (labor supply) as a function of the effective net wage and then simulate the impact of the changes in paid taxes and received benefits on employment. We find that a 10 percent rise in the net wage increases the probability of working by 0.55 and 0.18 percentage points for women and men respectively. These estimates suggest that the employment effect is unlikely to substantially alleviate the fall in net budget revenues. We predict that, for the sub-population of prime age employees, net government revenues decline by roughly 8 billion Czech korunas (CZK) as a consequence of the implemented income tax cuts. The employment effect counteracts the decline by only CZK 0.4 billion. The stimulating effect of the tax reform on employment is reduced by the current benefit system: the incentive to work due to the higher after-tax wage is partially offset by the fall in social benefits once people start working.

Suggested Citation

  • Alena Bicakova & Jiri Slacalek & Michal Slavik, 2006. "Fiscal Implications of Personal Tax Adjustments in the Czech Republic," Working Papers 2006/7, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2006/7
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2006_07.pdf
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    Citations

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    Cited by:

    1. 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.
    2. Alena Bicakova & Kamil Dybczak & Ales Krejdl & Jiri Slacalek & Michal Slavik, 2007. "CNB Economic Research Bulletin: Fiscal Policy and its Sustainability," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 5, number rb05/2 edited by Ian Babetskii & Vladimir Bezdek.
    3. Alena Bièáková & Jiøí Slaèálek & Michal Slavík, 2011. "Labor Supply after Transition: Evidence from the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 327-347, August.
    4. Karsten STAEHR, "undated". "Estimates of Employment and Welfare Effects of Labour Income Taxation in a Country with a Flat: the Case of Estonia," EcoMod2008 23800135, EcoMod.
    5. Dennis P Botman & Anita Tuladhar, 2008. "Tax and Pension Reform in the Czech Republic—Implications for Growth and Debt Sustainability," IMF Working Papers 08/125, International Monetary Fund.

    More about this item

    Keywords

    Fiscal effects; labor supply; personal income tax; tax reforms.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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