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The marginal cost of public funds in the EU: the case of labour versus green taxes

Author

Listed:
  • Salvador Barrios

    () (European Commission)

  • Jonathan Pycroft

    (European Commission)

  • Bert Saveyn

    () (European Commission)

Abstract

One key objective of tax-based fiscal consolidations which is too often disregarded in public debate is to minimise economic distortions. This paper uses a computable general equilibrium model to gauge these potential distortions by calculating the marginal cost of public funds (MCF) for EU member states. We consider two specific tax categories which are often proposed as good candidates for efficiency-enhancing tax shifting policies: labour and green taxes. Our analysis suggests that the economic distortions provoked by labour taxes are significantly larger than for green taxes. This result suggests that a green-taxes oriented fiscal consolidation would be preferred to a labour-tax oriented one (assuming that both tax increases would yield the same tax revenues). This holds for all EU member states modelled and despite the fact that potential welfare enhancement through pollution abatement are cancelled-out. Nevertheless, this result is slightly less strong when one considers the spillover effects between countries, which are more pronounced (in relative terms) for green taxes. This suggests that the use of green taxes for fiscal consolidation would be more effective were there to be close coordination across EU countries. In addition the efficiency losses associated with labour taxes are also likely to be greater when labour markets are less flexible (from an efficiency-wage perspective), a result also found to a small extent for green taxes. This raises the possibility that undertaking structural reforms (especially in the labour market) would help to minimize the efficiency losses entailed by tax-driven fiscal consolidations.

Suggested Citation

  • Salvador Barrios & Jonathan Pycroft & Bert Saveyn, 2013. "The marginal cost of public funds in the EU: the case of labour versus green taxes," Taxation Papers 35, Directorate General Taxation and Customs Union, European Commission.
  • Handle: RePEc:tax:taxpap:0035
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    File Function: final version, 2013
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    References listed on IDEAS

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    Cited by:

    1. Andrea ALBANESE & Bart COCKX, 2015. "Permanent Wage Cost Subsidies for Older Workers. An Effective Tool for Increasing Working Time and Postponing Early Retirement?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2015006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Yew-Kwang NG, 2017. "Ten Rules for Public Economic Policy," Economic Growth Centre Working Paper Series 1703, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    3. Frits Bos & Thomas van der Pol & Gerbert Romijn, 2018. "Should CBA’s include a correction for the marginal excess burden of taxation?," CPB Discussion Paper 370, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Amihai Glazer & Hideki Konishi, "undated". "Why High-level Executives Earn Less in the Government Than in the Private Sector," Working Papers 1713, Waseda University, Faculty of Political Science and Economics.
    5. Andrea Albanese & Bart Cockx & Yannick Thuy, 2015. "Working Time Reductions at the End of the Career. Do they prolong the Time Spent in Employment?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2015024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. repec:hpe:journl:y:2017:v:222:i:3:p:91-108 is not listed on IDEAS

    More about this item

    Keywords

    European Union; Taxation; labour taxation; environment; marginal cost public funds;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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