European Taxes in a Laboratory
Labour tax rates are considerably heterogeneous across European countries. In this paper, we investigate the effects of a policy experiment in which the tax rates levied on labour are harmonised in the member countries of the euro area. Using a four-country DSGE model, we find that shifts in domestic tax rates are the main driver of the total outcome of the policy change while spillover effects are rather limited in the long run. Countries that decrease their total tax wedge boost their economies while countries that increase their tax wedge lose a proportion of output. The adjustment process is rather complicated: a country which gains in the long run may temporarily go through a period of dampened economic activity. The adjustment process is complicated somewhat by the fact that a country which gains in the long run may temporarily go through a period of dampened economic activity. In terms of volatility, the euro area with its homogenous labour tax system may be better prepared to face common area-wide shocks. On the other hand, shocks originating outside the euro area may increase the volatility of euro area output under the homogenous tax regime.
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- Warne, Anders & Coenen, Günter & Christoffel, Kai, 2008. "The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 944, European Central Bank.
- Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014.
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- Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2011. "Can we prevent boom-bust cycles during euro area accession?," NBP Working Papers 79, Narodowy Bank Polski, Economic Research Department.
- Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
- McAdam, Peter & Straub, Roland & Coenen, Günter, 2007. "Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model," Working Paper Series 747, European Central Bank.
- IWATA Yasuharu, 2009. "Fiscal Policy in an Estimated DSGE Model of the Japanese Economy: Do Non-Ricardian Households Explain All?," ESRI Discussion paper series 216, Economic and Social Research Institute (ESRI). Full references (including those not matched with items on IDEAS)
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