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Labour Tax Shift in Slovenia: Effects on Growth, Equality and Labour Supply

Author

Listed:
  • Karolina Gralek
  • Silvia De Poli
  • Philipp Pfeiffer
  • Sara Riscado
  • Wouter van der Wielen

Abstract

The high tax burden on labour in Slovenia is likely to have an adverse effect on labour market outcomes and, in turn, potential GDP. This effect is particularly relevant in an ageing country whose active population is expected to shrink. International institutions have been recommending to Slovenia to rebalance its tax mix away from labour to more growth-friendly tax bases. In October 2019, the parliament adopted changes to the tax code to reduce labour taxes by lowering tax rates, raising tax brackets and increasing the general allowance. Against this background, this economic brief considers the potential effects of the reform, as proposed by the Ministry of Finance in summer 2019, on growth, income equality and labour supply, and weighs it against alternative scenarios. The aim is to highlight potential trade-offs and synergies. We use the European Commission macroeconomic QUEST model to show that the tax shift from labour to corporate income would be more distortive to growth than a shift to the recurrent tax on immovable property, which is currently relatively low in Slovenia. Based on the EUROMOD tax-benefit microsimulation model, we find that a lower tax burden on labour could reduce income inequality and increase labour supply. The effects depend on the design of the reform.

Suggested Citation

  • Karolina Gralek & Silvia De Poli & Philipp Pfeiffer & Sara Riscado & Wouter van der Wielen, 2020. "Labour Tax Shift in Slovenia: Effects on Growth, Equality and Labour Supply," European Economy - Economic Briefs 057, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecobri:057
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    References listed on IDEAS

    as
    1. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2014. "Comparing Labor Supply Elasticities in Europe and the United States: New Results," Journal of Human Resources, University of Wisconsin Press, vol. 49(3), pages 723-838.
    2. Jens Matthias Arnold & Bert Brys & Christopher Heady & Åsa Johansson & Cyrille Schwellnus & Laura Vartia, 2011. "Tax Policy for Economic Recovery and Growth," Economic Journal, Royal Economic Society, vol. 121(550), pages 59-80, February.
    3. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2012. "Comparing Labor Supply Elasticities in Europe and the US: New Results," SOEPpapers on Multidisciplinary Panel Data Research 525, DIW Berlin, The German Socio-Economic Panel (SOEP).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Slovenia; tax shift; tax burden on labour; personal income tax; corporate income tax; recurrent tax on immovable property; Labour tax shift in Slovenia: Effects on growth; equality and labour supply; Gralek; De Poli; Pfeiffer; Riscado; van der Wielen.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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