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The fiscal effects of work-related tax expenditures in Europe

Author

Listed:
  • Salvador Barrios
  • Serena Fatica
  • Diego Martínez-López
  • Gilles Mourre

Abstract

The paper examines the fiscal impacts, and the associated welfare cost, of marginal reforms to work-related tax relief in five European countries. We combine a theoretical model of labour supply with micro-simulation results from an EU-wide model, which allows us to capture the interaction between the specific tax incentive and other relevant provisions of the tax-benefit system along the entire earnings distribution. We find that changes in labour supply decisions – both at the extensive (participation) and at the intensive margin (hours worked) – have significant impacts on the revenue gain from the simulated reforms. Our results suggest that at least one-fourth of the extra tax revenues collected through a reduction in work-related tax incentives is washed away following labour supply adjustment, notably due to lower participation by individuals most at risk of exclusion. In some instances, the erosion of the initial revenue gain becomes substantial. For policies strongly targeted at the bottom of the earnings distribution, the reform might even bring about a net revenue loss, depending on the calibration of the labour supply elasticities to reflect heterogeneity across types of workers. The welfare effect of contractions to these tax schemes could be far from negligible.

Suggested Citation

  • Salvador Barrios & Serena Fatica & Diego Martínez-López & Gilles Mourre, 2015. "The fiscal effects of work-related tax expenditures in Europe," Working Papers. Collection A: Public economics, governance and decentralization 1504, Universidade de Vigo, GEN - Governance and Economics research Network.
  • Handle: RePEc:gov:wpaper:1504
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    References listed on IDEAS

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    Cited by:

    1. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2019. "Dynamic Scoring Of Tax Reforms In The European Union," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 38(1), pages 239-262, January.
    2. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    3. Salvador Barrios & Flavia Coda Moscarola & Francesco Figari & Luca Gandullia, 2020. "Size and distributional pattern of pension-related tax expenditures in European countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1287-1320, October.
    4. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

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    More about this item

    Keywords

    tax expenditures; labour supply; marginal welfare costs.;
    All these keywords.

    JEL classification:

    • 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
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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