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

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.