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Which taxes should be reduced to foster employment and growth? A Fiscal simulation framework for Madagascar

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  • Andrianady, Josué R.

Abstract

This paper develops a structural fiscal simulation model to evaluate the macroeconomic and budgetary effects of alternative tax reform scenarios in Madagascar. The model examines the impact of reductions in value-added tax (VAT), personal income tax (IRSA), employers’ social contributions, and customs duties, both individually and in combination, on output, employment, and public revenues. Simulation results show that isolated cuts in VAT or IRSA have negligible effects on production and employment but lead to substantial revenue losses. By contrast, lowering employers’ social contributions stimulates employment (+2.8%) and output (+1.8%) while limiting fiscal costs, highlighting the sensitivity of labor demand to labor costs. Reductions in customs duties modestly increase output (+1.9%) but do not affect employment significantly and generate large revenue shortfalls. A combined reform package maximizes output (+3.7%) and employment (+2.8%) but at a significant cost to public revenues (-39%), raising concerns about fiscal sustainability. Overall, targeted reductions in labor taxation emerge as the most effective instrument for promoting employment and growth while preserving fiscal balance in a developing-country context. The model provides a first-order analytical framework for Madagascar and a benchmark for future studies incorporating informality, distributional effects, and dynamic adjustments.

Suggested Citation

  • Andrianady, Josué R., 2026. "Which taxes should be reduced to foster employment and growth? A Fiscal simulation framework for Madagascar," MPRA Paper 127737, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:127737
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    References listed on IDEAS

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    1. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042, Elsevier.
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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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