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Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

Author

Listed:
  • Leon Bettendorf

    (Erasmus Universiteit Rotterdam, and CPB)

  • Albert van der Horst

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Ruud A. de Mooij

    (Erasmus Universiteit Rotterdam, CPB, Netspar, and CESifo)

Abstract

This paper analyzes the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rise in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and if equilibrium forces on the labour market are strong. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value-added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.

Suggested Citation

  • Leon Bettendorf & Albert van der Horst & Ruud A. de Mooij, 2007. "Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis," Tinbergen Institute Discussion Papers 07-056/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20070056
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    References listed on IDEAS

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    1. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document 125.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
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    9. Albert van der Horst & Leon Bettendorf & Hugo Rojas-Romagosa, 2007. "Will corporate tax consolidation improve efficiency in the EU?," CPB Document 141, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Albert van der Horst, 2003. "Structural Estimates of Equilibrium Unemployment in Six OECD Economies," Economics Working Papers 022, European Network of Economic Policy Research Institutes.
    11. Ruud Mooij, 2005. "Will Corporate Income Taxation Survive?," De Economist, Springer, vol. 153(3), pages 277-301, September.
    12. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    13. Albert van der Horst, 2003. "Structural estimates of equilibrium unemployment in six OECD economies," CPB Discussion Paper 19, CPB Netherlands Bureau for Economic Policy Analysis.
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    15. Timo Tyrväinen, 1995. "Real Wage Resistance and Unemployment: Multivariate Analysis of Cointegrating Relations in 10 OECD Countries," OECD Jobs Study Working Papers 10, OECD Publishing.
    16. Martin Finkenzeller & Christoph Spengel, 2004. "Measuring the Effective Levels of Company Taxation in the New Member States: A Quantitative Analysis," Taxation Papers 7, Directorate General Taxation and Customs Union, European Commission, revised Dec 2004.
    17. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
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    Citations

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    Cited by:

    1. Toshiki Tamai & Gareth Myles, 2022. "Unemployment, tax competition, and tax transfer policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 470-503, June.
    2. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.
    3. Yuya Kikuchi & Toshiki Tamai, 2019. "Tax competition, unemployment, and intergovernmental transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 899-918, August.
    4. Horst Feldmann, 2011. "The Unemployment Puzzle of Corporate Taxation," Public Finance Review, , vol. 39(6), pages 743-769, November.
    5. Alvarez Martinez, Maria Teresa & Barrios, Salvador & Bettendorf, Leon & d'Andria, Diego & Gesualdo, Maria & Loretz, Simon & Pontikakis, Dimitrios & Pycroft, Jonathan, 2016. "A New Calibration for CORTAX: A computable general equilibrium model for simulating corporate tax reforms," JRC Working Papers on Taxation & Structural Reforms 2016-09, Joint Research Centre.
    6. Eduardo Lora & Johanna Fajardo-González, 2016. "Employment and taxes in Latin America: An empirical study of the effects of payroll, corporate income and value-added taxes on labor outcomes," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 35(Especial ), pages 75-117, January.
    7. Leon Bettendorf & Albert Van Der Horst & Ruud A. De Mooij & Hendrik Vrijburg, 2010. "Corporate Tax Consolidation and Enhanced Cooperation in the European Union," Fiscal Studies, Institute for Fiscal Studies, vol. 31(4), pages 453-479, December.
    8. Obeng, Camara Kwasi, 2014. "Effect of corporate tax on sector specific foreign direct investment in Ghana," MPRA Paper 58454, University Library of Munich, Germany.
    9. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    10. Antonio Estache & Brigitta Gersey, 2018. "Do Corporate Income Tax Rates Cuts Create Jobs? The European Experience," Working Papers ECARES 2018-01, ULB -- Universite Libre de Bruxelles.
    11. Teguh Dartanto, 2012. "The 2008 Corporate Income Tax Reform and Its Contribution to Poverty Reduction in Indonesia," Working Papers in Economics and Business 201203, Faculty of Economics and Business, University of Indonesia, revised Apr 2012.
    12. Toshiki Tamai, 2022. "Unemployment, Fiscal Competition, and the Composition of Public Expenditure," KIER Working Papers 1072, Kyoto University, Institute of Economic Research.
    13. Antonio Estache & Beni Kouevi Gath, 2019. "Corporate Income Taxes and (Un-)Employment in the OECD," Working Papers ECARES 2019-11, ULB -- Universite Libre de Bruxelles.
    14. Zuo, Shengqiang & Wu, Bangzheng & Feng, Jun, 2023. "Does government reduction of the corporate income tax rate increase employment? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 365-372.

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    More about this item

    Keywords

    Corporate Tax; Structural Unemployment; Applied General Equilibrium; European Union;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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