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The Macroeconomic Effects of Tax Reform: Evidence from the EU

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Abstract

This paper examines the macroeconomic effects of tax changes in the EU between 2000 and 2016. The novelty of our approach hinges on the use of real-time estimates of discretionary fiscal adjustments, covering personal income taxes, social insurance contributions, corporate income taxes and value added taxes. In particular, exploiting a unique database covering anticipated and unanticipated tax reforms in the EU, we provide the first narrative estimates of output and employment multipliers for tax reforms in the EU. Our results suggest that medium-term revenue-based output multipliers are in the range of -1.8 for unanticipated and -2.3 for anticipated reforms. Preannounced reforms, moreover, portray larger labour supply responses (by 0.7 percentage points) and temporarily impact economic activity inversely upon announcement. Finally, we find evidence of asymmetry between the effects of revenue increasing and decreasing measures in the EU. On average, revenue-based consolidations resulted in a 1.2 percentage point larger medium-term output multiplier in absolute terms.

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  • van der Wielen, Wouter, 2019. "The Macroeconomic Effects of Tax Reform: Evidence from the EU," JRC Working Papers on Taxation & Structural Reforms 2019-04, Joint Research Centre (Seville site).
  • Handle: RePEc:ipt:taxref:201904
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    Keywords

    fiscal multipliers; narrative approach; discretionary tax reform;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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