Budget-neutral labour tax wedge reductions: A simulation-based analysis for selected euro area countriesMaria-Grazia Attinasi, Doris Prammer, Nikolai Stähler, Martino Tasso and Stefan Van Parys No 26/2016, Discussion Papers from Deutsche Bundesbank Abstract: 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. Keywords: Fiscal Policy; Tax Reforms; DSGE Modelling; Macroeconomics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:262016 Access Statistics for this paper More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC. |
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