IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

The fiscal effects of work-related tax expenditures in Europe

Listed author(s):
  • Salvador Barrios
  • Serena Fatica
  • Diego Martínez-López
  • Gilles Mourre

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://infogen.webs.uvigo.es/WP/WP1504.pdf
File Function: First version, 2015
Download Restriction: no

Paper provided by Universidade de Vigo, GEN - Governance and Economics research Network in its series Working Papers. Collection A: Public economics, governance and decentralization with number 1504.

as
in new window

Length: 44 pages
Date of creation: May 2015
Handle: RePEc:gov:wpaper:1504
Contact details of provider: Postal:
Campus Universitario As Lagoas s/n , 32004 Ourense

Phone: (+34) 988 368 725
Web page: http://infogen.webs.uvigo.es
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Holly Sutherland & Francesco Figari, 2013. "EUROMOD: the European Union tax-benefit microsimulation model," International Journal of Microsimulation, International Microsimulation Association, vol. 1(6), pages 4-26.
  2. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  3. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  4. Olivier Bargain & Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl & Nico Pestel & Sebastian Siegloch, 2013. "Fiscal union in Europe? Redistributive and stabilizing effects of a European tax-benefit system and fiscal equalization mechanism," Economic Policy, CEPR;CES;MSH, vol. 28(75), pages 375-422, 07.
  5. Leonard E. Burman & Marvin Phaup, 2011. "Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform," NBER Working Papers 17268, National Bureau of Economic Research, Inc.
  6. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  7. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
  8. European Commission, 2014. "Tax reforms in EU Member States - 2014 Report," Taxation Papers 48, Directorate General Taxation and Customs Union, European Commission.
  9. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
  10. Micael Castanheira & Gaëtan Nicodème & Paola Profeta, 2012. "On the political economics of tax reforms: survey and empirical assessment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 598-624, August.
  11. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2007. "Welfare reform in European countries: a microsimulation analysis," Economic Journal, Royal Economic Society, vol. 117(516), pages 1-44, 01.
  12. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
  13. H. Xavier Jara & Alberto Tumino, 2013. "Tax-benefit systems, income distribution and work incentives in the European Union," International Journal of Microsimulation, International Microsimulation Association, vol. 1(6), pages 27-62.
  14. Lovise Bauger, 2014. "The use of tax expenditures in times of fiscal consolidation," European Economy - Economic Papers 2008 - 2015 523, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  15. Shang-Jin Wei, 1997. "Gradualism versus Big Bang: Speed and Sustainability of Reforms," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1234-1247, November.
  16. Bev Dahlby & Ergete Ferede, 2011. "What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 324, March.
  17. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
  18. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2011. "Labor Supply Elasticities in Europe and the US," Working Papers 201114, School of Economics, University College Dublin.
  19. Martin Feldstein, 2014. "Raising Revenue by Limiting Tax Expenditures," NBER Chapters,in: Tax Policy and the Economy, Volume 29, pages 1-11 National Bureau of Economic Research, Inc.
  20. Micael Castanheira & Gaëtan J.A. Nicodème & Paola Profeta, 2011. "On the Political Economics of Tax Reforms," CESifo Working Paper Series 3538, CESifo Group Munich.
  21. Immervoll, Herwig & Pearson, Mark, 2009. "A Good Time for Making Work Pay? Taking Stock of In-Work Benefits and Related Measures across the OECD," IZA Policy Papers 3, Institute for the Study of Labor (IZA).
  22. Richard Blundell & Antoine Bozio & Guy Laroque, 2011. "Labor Supply and the Extensive Margin," American Economic Review, American Economic Association, vol. 101(3), pages 482-486, May.
  23. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, July.
  24. Eissa, Nada & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2008. "Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 795-816, April.
  25. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers 38, Directorate General Taxation and Customs Union, European Commission.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:gov:wpaper:1504. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patricio Sanchez-Fernandez)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.