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The macroeconomic impact of the income tax reductions in Malta

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  • Grech, Aaron George

Abstract

This paper presents estimates of the possible macroeconomic impact of the reductions in income tax introduced in the Budgets for 2013 and 2014. The simulations are based on the structural macro-econometric model described in Grech and Micallef (2014). The impact of the reductions on Government revenue, estimated at 0.7% of GDP, is computed using data on chargeable income under the different tax bands from the Inland Revenue Department as at 2013, with future income projected using Central Bank forecasts. The policy should have a positive effect on economic activity, with the impact on GDP peaking at 0.35% in 2016 and stabilizing at just under 0.3% in the medium term. This effect is primarily driven by increased consumption following the boost in disposable income caused by the cuts. While this is complemented by higher investment, the impact is gradually dampened by worsening net exports due to rising domestic prices. Though the policy is in part self-financing as it results in a larger tax base, it should be accompanied by measures to reduce pressure on government finances.

Suggested Citation

  • Grech, Aaron George, 2015. "The macroeconomic impact of the income tax reductions in Malta," MPRA Paper 63902, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:63902
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    File URL: https://mpra.ub.uni-muenchen.de/63902/1/MPRA_paper_63902.pdf
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    References listed on IDEAS

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    1. Grech, Aaron George & Grech, Owen & Micallef, Brian & Rapa, Noel & Gatt, William, 2013. "A Structural Macro-Econometric Model of the Maltese Economy," MPRA Paper 46128, University Library of Munich, Germany.
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    Keywords

    Fiscal Policy; Macro-econometric modelling; Malta;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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