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Budget-neutral labour tax wedge reductions: A simulation-based analysis for selected euro area countries


  • Attinasi, Maria-Grazia
  • Prammer, Doris
  • Stähler, Nikolai
  • Tasso, Martino
  • Van Parys, Stefan


Budget-neutral tax wedge reductions rank high in the policy agenda of several EMU member states. Using a New Keynesian DSGE model of a monetary union with a complex labour market structure and a comprehensive public sector, we evaluate the macroeconomic and welfare effects of reducing the firms' and workers' labour tax rates under alternative financing instruments. Overall, a tax wedge reduction is beneficial in terms of both welfare and output, as long as the financing measure does not harm private-sector productivity and/or the incentive for private capital investments over-proportionately. While financing the labour tax wedge reduction by an increase in consumption taxation yields most favourable output effects, financing it by a reduction in government spending is more beneficial in terms of welfare as the latter does not imply a policy-induced increase in private consumption costs. We also show that, when we assume that firms can adjust the ex- and intensive labour margin in response to policy changes, a reduction in the workers' and not the firms' burden is most beneficial.

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  • Attinasi, Maria-Grazia & Prammer, Doris & Stähler, Nikolai & Tasso, Martino & Van Parys, Stefan, 2016. "Budget-neutral labour tax wedge reductions: A simulation-based analysis for selected euro area countries," Discussion Papers 26/2016, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:262016

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    References listed on IDEAS

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    Cited by:

    1. Stähler, Nikolai, 2017. "A model-based analysis of the macroeconomic impact of the refugee migration to Germany," Discussion Papers 05/2017, Deutsche Bundesbank.
    2. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2016. "German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 307-324.
    3. M. Bussière & L. Ferrara & M. Juillard & D. Siena, 2017. "Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results," Working papers 625, Banque de France.
    4. Francesco Caprioli & Marzia Romanelli & Pietro Tommasino, 2017. "Discretionary fiscal policy in the Euro area: past, present, future," Questioni di Economia e Finanza (Occasional Papers) 398, Bank of Italy, Economic Research and International Relations Area.
    5. Ferdinandusse, Marien & Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Bańkowski, Krzysztof & Palaiodimos, Georgios & Trindade Campos, Maria Manuel, 2017. "Euro area fiscal stance," Occasional Paper Series 182, European Central Bank.

    More about this item


    Fiscal Policy; Tax Reforms; DSGE Modelling; Macroeconomics;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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