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Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria

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  • Christl, Michael
  • De Poli, Silvia
  • Varga, Janos

Abstract

This paper analyses the impact of the implementation of a child tax credit in Austria in 2019, not only on micro, but also on macro level by using a dynamic scoring methodology. First, we assess the fiscal and distributional impact of this reform using the microsimulation model EUROMOD. Second, we estimate labour supply impacts of the reform based on a structural discrete choice framework. Third, we evaluate the macroeconomic impacts of the reform, by calibrating and shocking QUEST, the DSGE model of the European Commission, with the micro-based results for the implicit tax rate, the non-participation and the labour supply elasticities. We show that the child tax credit reform in Austria reduces inequality, lowers the poverty rate in general, but by definition only for households with children. Overall the reform has a positive impact on labour supply, both on the extensive and on the intensive margin, especially for women. On the macro-level (and in the long-run), our model suggests a positive impact on employment. Additionally, we find that parts of the tax decrease can be potentially captured by the employer, meaning that gross wages would fall slightly. However, we find small but positive effects on GDP, investment and consumption, although the longrun macroeconomic effects depend crucially on how the government compensates the missing tax revenues after the reform. Accounting for these feedback effects at the micro level with a new methodology, we show that the second round effects are important to take into account, because they provide insights into the medium-term distributional impact of the reform.

Suggested Citation

  • Christl, Michael & De Poli, Silvia & Varga, Janos, 2020. "Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria," GLO Discussion Paper Series 464, Global Labor Organization (GLO).
  • Handle: RePEc:zbw:glodps:464
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    Cited by:

    1. Michael Christl & Silvia Poli, 2021. "Trapped in inactivity? Social assistance and labour supply in Austria," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(3), pages 661-696, August.
    2. NARAZANI Edlira & COLOMBINO Ugo & PALMA FERNANDEZ Bianey, 2021. "EUROLAB: A Multidimensional Labour Supply-Demand Model for EU countries," JRC Working Papers on Taxation & Structural Reforms 2021-15, Joint Research Centre (Seville site).

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    More about this item

    Keywords

    EUROMOD; tax credit; reform; DSGE; labour supply; microsimulation; discrete choice;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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